The news: Chinese demand for smartphone and PC chips is plunging, with some manufacturers stuck with up to five months of inventory, per The Register. Orders have dropped “like a rock” according to Zhao Haijun, CEO of Semiconductor Manufacturing International Corporation (SMIC), China’s largest chipmaker.
How did we get here? Zhao said some smartphone makers are overstocked on chips and holding off on ordering new products. PCs, consumer electronics, and even appliances are also in trouble, he added.
- The sales slump is being attributed to the war in Ukraine—which has made shipments to the Russian market untenable and has effectively removed ”Ukraine’s 44 million citizens out of the global market for non-essential purchases,” Zhao said during SMIC’s Q1 2022 earnings call.
- COVID-19 lockdowns in China have resulted in various factory closures and a five-month manufacturing low. SMIC has continued production throughout the lockdowns by operating a closed-loop system in which two-thirds of its workers have been living in their factories since March, per the South China Morning Post.
- Global chip stocks have lost nearly a quarter of their value this year, per MarketWatch. ”From an investment perspective, semiconductor stocks are almost uninvestable today,” said Evercore ISI analyst C.J. Muse.
- Zhao said the demand slump is affecting China more than other markets. The US and European markets have experienced a “very quick recovery,” but China’s buyers have ceased spending as a result of sweeping coronavirus lockdowns, he stated.
- SMIC expects smartphone sales in China to slip by 200 million this year.
What’s next? Inventory hoarding and overproduction of PC and smartphone chips is leading to an oversupply. This is one of the outcomes we predicted would follow the industry-wide move to establish new chip fabs and increase production capacities.
- The global chip crisis is expected to stretch into 2023 and possibly beyond for certain segments.
- The general reticence of Chinese PC, smartphone, and consumer electronics producers to buy more chips could abate once the COVID-19 shutdowns are lifted, but it could take months to reach pre-lockdown levels.
The big picture: For chip manufacturers like SMIC, they can either refocus their production on more in-demand sectors like EVs, or reduce output, which could lead to plant closures and job cuts.
- Zhao said there is still unmet demand for chips to power Wi-Fi 6, power conversion, green energy products, and analog-to-digital conversion. Doubling down on these segments could help chipmakers weather slowing demand for PCs and smartphones.
- SMIC’s experience with China’s plummeting chip demand is an example of what could happen on a global scale once chip supplies overwhelm demand, leading to supply chain glut.