The world is now awash in chips. The oversupply marks a sharp turnaround from a global shortage during two years of supercharged demand. Consumer appetite for electronics has weakened against a backdrop of rising interest rates, a falling stock market and recession fears.
Chip inventories are swelling, mirroring what is happening in the wider economy where retailers are stuck with goods on their shelves and producers of a range of products in high demand early in the pandemic now face a glut.
What is happening in chips amounts to good news for consumers who can get their hands on products from washing machines to laptops faster, and sometimes more cheaply, than a year ago. For chip makers, the shift has triggered a wave of job cuts and reduction in capital spending as companies try to restore profitability levels that have eroded in recent months.
Chip inventory levels are "well above our target level," said Sanjay Mehrotra, chief executive of memory maker Micron Technology Inc., as the company on Thursday missed Wall Street earnings projections, gave a subdued outlook and said it would cut about 10% of its workforce.
Lead times between chip orders and deliveries that swelled early in the pandemic have fallen in recent months, according to an analysis by Susquehanna International Group LLP. Inventory levels, typically measured in days, are at their highest levels in more than a decade, or about 40 days above the median for the chip industry and its supply chain, according to a UBS analysis.
Much of what is playing out for chip makers is illustrated by the reversal in fortunes that gadget makers have experienced over recent months. HP Inc. and Dell Technologies Inc., two of the largest PC makers, say their products that flew off the shelves early in the pandemic now are sitting there for longer.
HP Chief Executive Enrique Lores has said the inventory of consumer-oriented PCs is likely to remain elevated through the next two quarters, although he has pointed to signs it is beginning to get cleared out.
"Today we have a large inventory, especially on the consumer side, which is driving very aggressive pricing because all of us are trying to reduce those inventories," he said in December at an investor event. Dell struck a similar tone in November, saying distributors of PCs were rolling out promotions in an increasingly price-competitive market, though it wasn't itself discounting.
Intel Corp. Chief Executive Pat Gelsinger in October said that "it's just hard to see any points of good news on the horizon," as the company issued its most recent muted earnings outlook and announced job cuts. Rival Advanced Micro Devices Inc., which also makes central processing units that go into personal computers, has warned about elevated inventory levels.
AMD chief Lisa Su said the company is trying to address the situation by shipping fewer chips than there is demand for. Her PC-making customers are similarly adjusting, she said.
"Even as they were selling through their inventory, they were not replenishing stock to the same levels," she said. "I think the market will continue to be volatile."
Chip executives have said they expect the situation to gradually improve next year, though there is still uncertainty about when an industry known for its sharp boom-and-bust cycles is poised for its next upturn.
Graphics-chip company Nvidia Corp., America's largest chip company by value, has said excess inventory could mute the benefit of a recently announced new generation of superfast videogaming graphics chips. Nvidia's customers, the company said, are trying to burn through existing stocks before replenishing and buying the latest processors.
Inventory levels are expected to approach normal levels at the end of the company's current quarter, which ends in January, Chief Financial Officer Colette Kress said in November.
Others put the turnaround later in the year. Micron said that it is expecting the situation to persist through the first half of its current fiscal year, which ends in September. Most customers are expected to have reduced their stocks to healthy amounts by the middle of 2023, Mr. Mehrotra said in a call with analysts.
It isn't just PC shipments, poised for their sharpest fall in more than two decades, that are denting chip makers' fortunes. Smartphones sales, too, have been languishing. Micron said it cut its projection for handset shipments this year from its outlook just three months earlier.
Qualcomm Inc., which supplies chips that go into flagship smartphones from Samsung Electronics Co. and Apple Inc., has repeatedly cut its sales projections this year. The company in November said it expected a persistently lackluster phone market and elevated chip inventories. Chief Financial Officer Akash Palkhiwala said at an event this month that the issue would take a couple quarters to resolve.
Despite the near-term glut, chip executives are preparing for a long-term rise in demand for chips that will require them to build more factories. Industry executives expect chip sales to roughly double by 2030, surpassing $1 trillion globally. Micron is planning a facility in upstate New York that could cost as much as $100 billion and would be partially funded by new U.S. chip-manufacturing incentives.
Some chip makers see the inventory buildup as an opportunity. While makers of CPUs at the heart of PCs need to deliver their product before a new, more capable version is introduced, others make chips that won't fundamentally change for years.
Lattice Semiconductor Corp., which makes chips for the defense industry, data centers and some consumer devices, has seen its inventory rise by around 29% in the year to Oct. 1, according to its third-quarter earnings report. But Chief Executive Jim Anderson said he wasn't concerned.
"Our products last for 15 or sometimes 20 years," he said. "So the risk of our products being obsolete is very low and it makes more sense for us to bias toward holding more inventory versus less."
