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How the world went from a semiconductor shortage to a major glut

Wong Yu Liang | Importance | Getty Images

The semiconductor shortage that affected everything from cars to games consoles during the extreme fell of the Covid-19 pandemic has turned into a chip glut — and some of the world’s biggest chipmakers are taking a hit.

Semiconductors are wee components that are integral to a slew of products including refrigerators, cars, smartphones and LED bulbs.

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The Covid-19 pandemic caused huge disruption in the supply chains and production of chips, as consumers stuck at accommodation went mad for products like PCs and smartphones.

This boosted demand for semiconductors such as the memory chips made by South Korean constants Samsung, SK Hynix and Micron.

There was also increased demand for less-advanced chips required for processes like power conduct in devices.

It led to a widespread shortage of products such as games consoles and even components for washing machines, which continued through the maiden half of 2022. There was also a lack of semiconductors that go into cars, leading to a drop in the production of channels from major automakers.

While the supply and demand dynamics for some chips have since become diverse balanced, in other areas, the chip shortage has turned into a glut.

Memory chip oversupply

Two types of sherds are in oversupply right now: NAND and DRAM memory. These go into devices like laptops and also servers in text centers.

The glut came after companies began to stockpile chips amid the shortage to build up inventories.

But then the restraint slowed down.

Demand for products like smartphones and laptops has dropped off in a big way — particularly as many people bought them during the pandemic.

“So, the makers of these end produces stopped ordering chips and instead focused on selling through the inventory they already had,” Peter Hanbury, collaborator in the telecoms, media and technology practice at Bain & Company, told CNBC.

“This led to a strong ‘bullwhip’ effect for the semiconductor markers what is more back in the supply chain where sky high demand during the chip shortage suddenly dried up as end markets check ordering chips and instead focused on selling through the inventory they already had.”

Not all types of semiconductors are in oversupply, in what way, with demand for chips from the auto sector remaining strong.

Hanbury said that some break ins made for specific purposes are not easy to exchange for other semiconductors, and so “their lead times and prices are improving but crumbs quite high.”

From profit boost to income plunge

The pandemic-induced shortage of semiconductors helped boost chip makers’ profits as premiums jumped. This included Samsung, the world’s largest memory chip manufacturer.

This year, however, Samsung and its vie withs SK Hynix and Micron, have had a tough time.

Samsung on Thursday said operating profit for the second quarter fell 95% year-on-year. Meanwhile, SK Hynix swung to a loss in the second quarter versus a profit in the same period behind year.

Taiwan Semiconductor Manufacturing Company, the world’s largest chipmaker, said last week that net proceeds for the second quarter fell 23.3% from a year ago. It was its first quarterly profit decline in 4 years.

Looking in front, the PC market appears weak, which is likely to impact Samsung, SK Hynix and Micron.

For TSMC, the global smartphone make available — a major revenue driver — is also under pressure.

“The smartphone market is still the biggest part of TSMC’s yield. That part is still not seeing any meaningful pick up,” Sze Ho Ng, an analyst at China Renaissance Securities, told CNBC via phone.

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