Global chipmakers such as Intel and Samsung are breathing a sigh of relief as they witness the beginning of the end of a semiconductor supply glut. However, amidst this changing tide, demand for chips from customers outside the artificial intelligence (AI) industry is still in a gloomy state. The major markets for chips, including smartphones, PCs, and data centers, have all shrunk this year. This contraction can be attributed to both corporate customers and consumers scaling back spending due to the weak global economy, high inflation, and rising interest rates. Consequently, an oversupply of commodity chips has emerged, resulting in a staggering first-half operating loss of KRW 15.2 trillion (nearly Rs. 98,650 crore) for the world’s top two memory chipmakers, Samsung and SK Hynix.
Despite the challenges faced by the industry, the semiconductor supply glut is gradually starting to ease. This change can be attributed to production cuts and a decrease in the decline of PC shipments. In the June quarter, PC shipments only slumped by 11 percent, in comparison to the sharp 30 percent drops witnessed in the previous two quarters, as reported by tech analysts Canalys. Similarly, the smartphone market is showing signs of improvement, with cellphone shipments falling by 8 percent in the June quarter, compared to a 14 percent drop in the first quarter, according to research firm Counterpoint. These modest improvements indicate a slow recovery in chip demand.
The Impact of AI on Chip Demand
While the demand for chips to support generative AI has seen rapid growth since the launch of OpenAI’s ChatGPT, it still represents only a small fraction of the overall chip demand. However, this increased focus on AI is impacting corporate spending on servers, as some companies prioritize investing in AI technology. Intel CEO Pat Gelsinger acknowledged that the inventory glut in server central processing units (CPUs) will persist until the second half of the year. As a result, data center chip sales are expected to decline in the third quarter before recovering in the fourth quarter. Notably, Intel’s shares rose by 6.4 percent after better-than-expected results were announced.
The sluggish recovery in China, the world’s largest chip buyer, also contributes to the uncertain outlook for the semiconductor industry. Both Samsung and SK Hynix have expressed disappointment as China’s reopening failed to rejuvenate the smartphone market. Consequently, these companies have extended production cuts of NAND memory chips, which are widely used in smartphones to store digital data. Analog chipmaker Texas Instruments is facing similar challenges, as it reported third-quarter revenue and profit forecasts below Wall Street targets due to a sluggish recovery in end-market demand prompted by order cancellations from clients. It is crucial to note that China accounted for approximately half of Texas Instruments’ sales at the end of fiscal year 2022, emphasizing the significant impact of China’s recovery on the company’s business.
The AI Boom and its Impact on Chip Manufacturers
While the chip industry faces uncertainty, there are winners emerging from the AI boom. Manufacturers of chipmaking equipment, such as KLA Corp and Lam Research, have experienced early success during this period. Both companies have forecasted quarterly revenue above Wall Street estimates. KLA Corp’s shares saw a 4.9 percent increase, while Lam Research’s shares rose by 2.2 percent. According to Lam CEO Tim Archer, advanced AI servers require significantly more leading-edge logic, memory, and storage content than traditional servers. As AI server penetration increases by 1 percent, it is expected to drive $1 billion (nearly Rs. 8,200 crore) to $1.5 billion (nearly Rs. 12,330 crore) of additional chip equipment investment. Furthermore, chipmakers are ramping up production of high-end chips necessary to support AI-related technologies. SK Hynix reported that demand for AI server memory more than doubled in the second quarter in comparison to the first quarter. Additionally, the average selling price of its DRAM chips, which hold information from applications while the system is in use, increased in the second quarter.
The semiconductor industry is navigating through a shifting landscape. While an oversupply of commodity chips had caused significant losses for leading chipmakers, recent trends indicate a gradual recovery in chip demand. The growth of the AI industry and the emergence of advanced AI servers offer new opportunities for chip manufacturers. However, challenges remain, especially in markets like China. As the industry continues to adapt to evolving customer demands, chipmakers will need to balance their strategies to capitalize on the recovering demand while navigating the impact of AI adoption and market volatility.
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