Chip makers and other hardware suppliers have had a banner two years. But the darkening global economic picture is beginning to nibble away at their bread and butter.
The good news: The chip shortage of the past two years could be easing. That, however, is bad news for Asian economies and companies along the tech supply chain. Headwinds to chip demand are now gathering force in both China and the U.S.
The slowdown in China’s economy and shuddering momentum in the American technology sector will dent demand for electronic devices from both consumers and businesses. Shipments of smartphones and personal computers have already begun falling on a year-over-year basis. Smartphone shipments dropped 8.9% on the year in the first quarter while PC shipments were down 5.1%, according to industry tracker IDC.
In most of the world, consumers are switching their spending from goods to services as economies reopen. Concerns about inflation could put them off further. China is dealing with a more generalized hit to incomes and consumption from its fierce anti-Covid policies, which resulted in much of Shanghai being locked down this spring. Smartphone shipments in China fell 14.1% in the first quarter, according to IDC.
Across the Pacific, the rout in U.S. technology stocks could lead to lower spending on IT equipment. Funding for startups is drying up. Spendthrift tech companies may need to start tightening their purses and watching their bottom lines. Server chips for data centers, in particular, have been a huge source of growth for chip makers in the past couple of years but lower spending from tech firms may change that.
There is a silver lining: Semiconductor shortages, which have been a headache for the global economy for much of the past 18 months, could finally start to ease as demand growth ebbs. Days of inventory increased to 53 days in the first three months this year, from 42 days in the previous quarter, according to Credit Suisse, which tracks more than 200 companies across the technology supply chain. Inventories have been trending up since the pandemic as companies stocked up to head off manufacturing and logistical challenges. But a slowdown in end demand with companies sitting on high levels of inventories could hurt suppliers later this year.
East Asia, where most tech suppliers are based, will feel the pain acutely. Recent lockdowns in Shanghai and other Chinese cities have disrupted both supply and demand for neighboring economies like South Korea and Taiwan. Korea’s exports picked up in May, but partly that’s because there were fewer working days in that month last year. Adjusting for that, daily export growth would have decelerated further from April, especially for major exports like semiconductors and flat panel displays, according to Morgan Stanley. The reopening of Shanghai may give a short-term boost, but weakness in China’s consumption will persist as long as it sticks with some iteration of its zero-Covid policy. Any significant change in that is unlikely until early 2023 at the soonest.
Foundry leader Taiwan Semiconductor Manufacturing Co. may weather slowing demand better given that it has been winning market share from smaller players with its technological leadership and strong pricing power. Companies with products more sensitive to industry pricing cycles—like memory chips for Samsung Electronics and SK Hynix—could suffer more.
Asian tech suppliers have benefited from strong consumer demand since the early days of the pandemic. It isn’t thundering yet, but the sky will get a bit darker this year.