Microchip makers have a new problem called demand crunch

For the last 2 years, there was only one complaint from electronic equipment producers and auto manufacturers. There was an acute shortage of microchips. Now microchips are the intelligent pieces of memory and processing that are the brain and soul of any electronic system.

With advances, today chips are part of everything from your mobile phones to cars to washing machines to refrigerators; apart from traditional PCs and mobile phones.

Why did this chip shortage come about There are two sides to it; the demand side and the supply side. On the demand side, the pandemic led to a tremendous surge in chip demand.

Greater demand for home office and home learning needs meant more powerful PCs, notepads and mobile phones. All these require higher end chips. People who could not move out of their homes were splurging their money on electronics, gaming consoles etc. 

If demand for chips was surging, the other side of the story was the supply. There are very few high end chip makers in the world as it is not only capital intensive but also very hygiene and compliance intensive.

The largest fab chip maker, TSMC of Taiwan, spends on an average $5 billion per year on capex. Despite, these outlays, chip supplies take time to come to the market and the shortfall could take about 2-3 years to fill up.

In the midst of all the hue and cry over the chip shortage, there is a new challenge in front of the chip makers that has cropped up. Currently, many chip makers and other hardware suppliers are starting to face some serious headwinds.

As China is already into a slowdown and the US is at risk of a recession amidst sharply rising interest rates, the chip makers are facing a situation where the slowdown is nibbling away at their bread and butter.

The positive side is that the chip shortage is easing. But the fear is that the demand for chips could suddenly start easing if there is a large scale slowdown in two of the world’s most powerful economies viz. the US and China.
 

The easing shortage of chips means that Asian companies at the high end of the supply chain will not have the pricing power any longer. The headwinds to chip demand are now gathering force in both China and the US.

Global research firm, IDC, has just pointed out that the likely slowdown in China and the US could have serious repercussions for chip demand. China is in an induced slowdown as it gets very aggressive in its attempts to control the spread of COVID.

However, the risk is that it could translate into a slowdown in demand and the Asian economies would be the worst sufferers. That is already evident in the falling demand for electronic products of late.

That is the story and the narrative on chips appears to eb changing. The slowdown in China and the weak momentum of the US tech sector is not great news for chip companies. It could dent the demand for electronic devices from both consumers and businesses.

The impact is visible. The shipments of smartphones and personal computers have begun falling on a YoY basis. That is the first evidence that chip demand could follow soon.

In the first quarter of 2022 ended March 2022, smartphone shipments dropped 8.9% on a yoy basis while the PC shipments were down 5.1%. Clearly, if that were to fructify, then the narrative would change too rapidly for the liking of the chip companies.

From a scenario of shortage of chips and pricing power, they may suddenly transform into a surplus sector with limited pricing power. For now, that trend is just about visible in the fringes.