Weak demand for consumer electronics have driven chip makers to cut production, but carmakers are still struggling.
Photo from CFP
By Peng Xin
For more than a year, chipmakers couldn’t keep up with demand but the boom seems to have come to an abrupt end. Since May, even the biggest and most profitable of them have slashed production- everyone knows that tough times lie ahead. MediaTek and Qualcomm both plan to cut 5G chip production in H2. Micron Technology warns that the market has "weakened considerably in a very short period of time."
Consumers are buying fewer electronics and probably will not buy more any time soon. Phone shipments fell 9 percent in Q2, PCs by 12.6 percent. Phone makers in China have abandoned any optimism in their sales projections. Huawei’s high-end share has gone mostly to Apple. The mid-market has underperformed as buyers with less money to spend are repositioning themselves at the lower-end and buying phones that suit their needs rather than their image.
“Demand is weak, so are focused on a few select lines,” said XU Qi of Realm. The company has cut its sales target by more than 10 percent. “It’s an illusion that there’s a chip shortage. Demand never really exploded as people expected. If phone sales fail to pick up by the end of the summer, component prices will tank.”
Excess inventory hasn’t helped. Samsung had so many spare components that it told suppliers to stop shipping them. There is a glut of display driver integrated circuits (DDIC), a key component of phone screens, driving production cuts of up to 30 percent. Q2 revenue of Novatek, the biggest DDIC maker, was down 14 percent.
On the other hand, car chips are still in short supply. Carmakers now have to wait for a year on average for orders to be delivered. That is if anyone takes their orders at all. There are about 500 chips in a traditional ICE car, while an EV needs up to 2000 of them. Certain key components, such as automotive microcontroller units (MCU), are in particularly high demand. Market research company IC Insights estimates MCU sales will increase by 7.7 percent in 2022.
“Chips are constantly in short supply. We are always looking for them and thinking about what to do without them. It’s very painful,” said LU Jiping, who oversees the supply chain at Li Auto. He concedes that the situation this year is better than last year’s and that shortages are concentrated in a few products.
Big car makers who can buy directly from chipmakers have secured supplies by offering higher prices, but smaller companies cannot. In Shenzhen, the de facto chip exchange of the country, the market is chaotic. “The price swings are just crazy. There are plenty of goods in the warehouse, but somehow buyers are still looking for them,” a seller said. “Prices are all over the place. For the same chip, some ask for 200 yuan, but some charge as much as 1000.”
“If other sellers ask for 100, I can probably do 60,” another seller said. “I agree to any price as long as I don’t lose money.”
All chip makers and distributors interviewed say they are trying everything to restore balance in the market, such as by moving capacity from consumer electronics to cars. But switching can be costly and time-consuming. So is building extra capacity.
The past year has been nerve-racking for everyone in Shenzhen. Some made a fortune. Some hoarded the wrong chips and are now unable to get rid of them. Some are peddling used and refurbished chips of dubious provenance and performance. Scalping is prevalent. Car chips are sold out seconds after they are back in stock. Dealers use robots to buy them and resell them at inflated prices.
Factories are lowering prices by as much as 10 percent to dissuade customers from canceling orders. It will take several quarters for the market to dispose of the excess inventory. However, some chip makers have raised prices to offset costs and discourage hoarding. Marvell increased the prices of some products by 7 percent. Intel and Qualcomm also told buyers to expect price rises.