July 8, 2022
Early signs are emerging that the chip shortage may ease faster than expected, with the possibility of an inventory crisis in late 2022.
Samsung may announce significant price cuts on memory products in H2, according to Digitimes. Demand from retail customers in China and from the data center sector globally has been unexpectedly weak, leaving the foundry with excess inventory later in the year. As memory is a commodity business with low margins, a major vendor cutting prices is likely to cause a price war as its competitors cut prices to retain market share.
If this is so, it may signal the start of a wider transition out of the chip shortage. Supply chains exhibit the so-called bullwhip effect, where buyers respond to inventory shortfalls by increasing their orders at each step in the chain. As a result, an initial change in final demand results in a disproportionate swing in demand at the factory gate. The same logic also operates between different supply chains, with variation in demand being aggregated into sectors such as semiconductors or energy that feed into many other supply chains.
In 2020 and 2021, demand for digital entertainment by retail customers stuck at home during COVID-19 lockdowns and from enterprises kitting out their suddenly remote workforces caused a major PC replacement cycle.
From mid-2020, industrial customers such as automakers began filling their inventories ahead of re-opening, and then increasing their orders in response to the unprecedentedly fast recovery of demand for goods. At the same time, demand for semiconductors from hyperscale, AI, and cryptocurrency mining continued to be strong. The result was the global chip shortage, with long wait times, a wave of investment in foundry capacity, and spiking prices driving inflation in the wider economy.
If major foundries are now expecting to be overstocked later this year, this is an indicator that the “whip” is going to crack. Distributors and OEMs will see their delayed orders arrive and their inventories flooded with stock, causing them to cut their orders from the foundries and lower their prices to clear the overstock.
This suggests a difficult second half of the year for the foundries and their upstream suppliers, and at the same time, a relaxation of inflationary pressure and an improvement in supply.
Leading-edge process nodes have been less affected by the chip shortage than, for example, microcontrollers or memory, but availability has definitely been a problem for key AI products such as workstation and server GPUs. Although demand from automotive may cool off as inventories surge and some of the frothier startups exit, regulatory changes (L2 ADAS is becoming essentially mandatory in the European Union) will underpin demand from this source.
Gaming demand is likely to weaken as a classic replacement cycle dynamic sets in – a lot of the buyers from 2020 and 2021 won’t be in the market for a new rig for some time – while demand from cryptocurrency mining is being crushed by the sector’s crisis.
As such, AI development is likely to be one of the stronger sources of demand for GPUs and other high-end hardware, and both availability and prices are likely to improve faster than we think.
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