The Business Times

Chipmakers worry industry will make too many semiconductors

The unprecedented surge in investment is fuelling fears that profits will take a hit as demand subsides

Published Fri, Jul 23, 2021 · 05:50 AM


CHIPMAKERS from Taiwan to the United States are cranking up production to address shortages that have hammered automakers and other customers as they try to emerge from the coronavirus pandemic.

Now the unprecedented surge in investment is fuelling fears that the industry will overshoot, adding so much capacity in the years ahead as demand subsides that profits will take a hit.

In the latest sign of concern over demand, Texas Instruments, one of the largest makers of chips, warned that revenue for the third quarter could fall short of some analysts' estimates. Sales will be US$4.4 billion to US$4.76 billion in the period ending in September, the company said, compared with analysts' prediction of US$4.59 billion. Shares fell about 4 per cent in extended trading.

The forecast was particularly puzzling because it came after the largest maker of analog and embedded processors reported a 41 per cent surge in second-quarter revenue.

It led to a barrage of questions from analysts on why the company is not more optimistic and whether we are seeing the first signs of a slowdown in the notoriously cyclical industry.


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Management cautioned that it could not anticipate whether demand is peaking or whether growth at the current levels is sustainable.

"Our job isn't to predict the future, it's to prepare the company so we can handle anything and we've done that," chief financial officer Rafael Lizardi said in an interview. "Some would argue that this time it's different, but that's a dangerous argument."

Like other chipmakers, Texas Instruments has posted multiple quarters of double-digit percentage revenue growth, boosted by demand for a wide variety of devices that contain its tiny electronic components.

The rapid run-up has caused speculation among analysts and investors that some of the orders reflect panic buying by customers who have grown anxious they would not be able get enough supply. Such behaviour in the past has caused crashes.

"TI posted yet another puzzling earnings report. Revenue for the quarter significantly beat guidance, but it guided revenue flat, without much explanation for the conservative guidance," said Raymond James analyst Chris Caso said.

"Our view is that management likely suffers from a lack of confidence at the macro level, despite what clearly continues to be tight supply conditions at both TI and the semi industry at large."

Lead times, the gap between ordering a semiconductor and taking delivery, increased to 19.3 weeks in June, a week and a half longer than in May, research from Susquehanna Financial Group showed. That gap, already the longest wait time since the firm began tracking the data in 2017, is now more than five weeks longer than the previous peak in 2018.

Texas instruments itself said the amount of in-house inventory fell to 111 days in the quarter, well short of the 130 to 190 days the company likes to have on hand. The company's lead times have stretched for an increasing number of products.

The entire chip industry is cranking up investments to meet the surging demand. Taiwan Semiconductor Manufacturing, the world's top chipmaker, has pledged to invest US$100 billion over three years, including in a new fab in the US.

South Korea's Samsung Electronics and SK Hynix will lead more than 510 trillion won (S$604 billion) of investment in semiconductor research and production in the years to 2030 under a national blueprint devised by President Moon Jae-in's administration.

Executives such as Intel chief executive officer Pat Gelsinger have predicted long-term growth for the industry at well above historical levels.

They argue that chips are simply in more and more devices that never needed them and that will mitigate some of the historical slumps when the industry primarily supplied the computer and phone industries.

This week, ASML Holding, the leading provider of equipment to make chips, said orders for machines that make high-end semiconductors rose to a record as TSMC and Samsung get in line for key machinery. That gear however would not be producing chips until next year, at the earliest.

ASML CEO Peter Wennink said the ongoing efforts by several governments to build chip capacity at home will boost orders for semiconductor equipment.

The company has historically underestimated how quickly the industry would grow in the past 15 years and he said it is working to boost manufacturing to keep up.

TSMC CEO CC Wei said in an earnings call last week that he expects the company's capacity to remain tight throughout this year and into 2022.

There are signs the shortages are easing. This year, US Commerce Secretary Gina Raimondo brokered meetings between semiconductor manufacturers, their suppliers, and their customers, including automakers.

She said this week there are improvements and companies such as Ford Motor and General Motors are getting "a bit more of what they need". BLOOMBERG

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