The semiconductor industry is witnessing a shift from oversupply to a more balanced state, prompting jubilant celebrations among major chipmakers like Intel and Samsung. However, the demand for chips outside the artificial intelligence (AI) domain continues to appear somber.
Global chip markets for smartphones, PCs, and data centers have experienced a downturn due to reduced spending by both corporate clients and consumers. The weak global economy, coupled with high inflation and rising interest rates, has exacerbated the situation.
Consequently, there’s an unprecedented oversupply of commodity chips, leading to substantial operating losses for leading memory chip manufacturers Samsung and SK Hynix, amounting to a staggering 15.2 trillion won ($12 billion) in the first half of the year.
Nonetheless, this glut is slowly easing as production cuts take effect. The PC sector has shown signs of recovery, with the decline in shipments lessening to 11% in the June quarter, compared to the drastic 30% slumps experienced in the previous two quarters.
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The smartphone market is also showing improvement, with cellphone shipments falling only 8% in the June quarter, as opposed to 14% in the first quarter.
Despite the recovery, it’s important to note that the progress is gradual. Woohyun Kim, the CFO at SK Hynix, emphasized this during an earnings call, indicating that the recovery has been modest and mainly driven by promotions and low-end models. Consequently, earlier shipment forecasts for PCs and smartphones have been downgraded.
While the demand for chips supporting generative AI has surged since the launch of OpenAI’s ChatGPT, it still represents a small fraction of overall chip demand.
This surge has led to some companies prioritizing investment in AI over other areas, impacting corporate spending on servers.
Intel CEO Pat Gelsinger predicts that an inventory glut in server central processing units (CPUs) will persist until the second half of the year, and data center chip sales will experience a modest decline in the third quarter before recovering in the fourth quarter.
However, a sluggish recovery in China, the world’s largest chip buyer, casts a shadow on the overall outlook.
China’s reopening has failed to meet expectations of reviving the smartphone market, leading both Samsung and SK Hynix to extend production cuts of NAND memory chips, which are widely used in smartphones for data storage.
Texas Instruments, an analog chipmaker heavily exposed to China, also faces challenges with a sluggish recovery in end-market demand, resulting in canceled orders from clients.
Despite these challenges, there are winners emerging from the AI boom. Companies like KLA Corp and Lam Research, which manufacture chip-making equipment, are experiencing early successes.
Both firms forecast quarterly revenue above Wall Street estimates, leading to a surge in their share prices. Lam CEO Tim Archer highlighted the increased demand for AI servers, which necessitates additional investment in chip equipment.
Furthermore, chipmakers are ramping up production of high-end chips to support AI applications.
In the second quarter, demand for AI server memory more than doubled compared to the first quarter, and DRAM chips, responsible for holding application data during system use, commanded higher prices in the second quarter.
SK Hynix leads the market in high bandwidth memory (HBM) DRAM used in generative AI, with a 50% market share, followed by Samsung with 40% and Micron with 0%, as per TrendForce data from 2022.
This trend showcases the growing significance of AI-related chips in the industry.