Since 2020, due to the impact of the epidemic, the global chip shortage, the decline in demand for electronic products, and this year's Russia-Ukraine conflict, the global economic situation has been declining rapidly. According to foreign research reports, 170 industries in the world are affected by the chip shortage, such as automobiles, consumer electronics, home appliances, data centers and other industries that have a direct impact on the national economy and people's livelihood. Therefore, if the chip supply is not in good condition, it will inevitably trigger a series of global economic problems.

The chip demand rate in 2021 was 17% higher than in 2019, but due to the epidemic shutdown and other reasons, chip shipments were far from meeting demand, which caused huge losses to the global automotive industry.

Last year, automobile factories of many brands around the world were forced to stop production due to chip shortages. Data shows that global automobile manufacturers stopped production of 3.6 million new cars, directly resulting in losses of up to $110 billion, of which Europe lost $13.4 billion and North America lost $5.2 billion.

The chip shortage has caused even greater losses to the consumer electronics sector. Apple revealed in its fourth-quarter 2021 financial report that the supply chain crisis caused a decline in production capacity of iPhones, iPads and Macs, resulting in a reduction in revenue by $6 billion.

What caused the chip shortage?

Everyone knows that there is a chip shortage now, but a less well-known fact is that the shortage does not include mid- and low-end chips, but rather high-end chips below 7nm.

Many countries in the world, including my country, can produce chips, but most of them are mid- and low-end chips. Chips like 14nm, 7nm, and 5nm are difficult to manufacture because the threshold for the chip manufacturing industry is very high. For example, Huawei Kirin's 5nm chip, although Huawei can design it itself, it is unable to produce it independently due to factors such as manufacturing equipment. After being sanctioned, it becomes even more difficult, resulting in Huawei's 5G mobile phones being removed from the shelves and switched to 4G across the board.

When it comes to chip manufacturing equipment, we have to mention lithography machines. As the top equipment in the chip manufacturing industry, lithography machines like the ASML lithography machine from the Netherlands require the use of top technologies from multiple countries to be manufactured, and the quantity is limited, so many devices have been booked by leading manufacturers in the chip industry, but are far from meeting demand, which has indirectly led to a chip shortage.

Finally, there are raw materials. Due to the epidemic in the past two years, many companies have stopped production, resulting in a large demand for chip manufacturing wafers, but production capacity cannot keep up, so the supply is small. As the raw material for silicon wafers used to make silicon semiconductor circuits, the shortage of wafers directly affects chip production, resulting in an imbalance in supply and demand, and a series of industrial chains have been affected.

Supply exceeds demand, big manufacturers cut orders

This year, major chip manufacturers have gradually resumed work, resumed production and increased production capacity. However, in the current global economic recession, major chip manufacturers have encountered "order cuts". For example, global smartphone shipments in 2022 will be 311.2 million units, a year-on-year decrease of 11%. Only 75.6 million units will be shipped in mainland China, a year-on-year decrease of 18% and a month-on-month decrease of 13%.

As mobile phone sales decline, 5G chips are naturally in oversupply. Mobile phone chip manufacturers MediaTek and Qualcomm have cut 5G chip orders for the second half of the year. Among them, MediaTek's mid- and low-end product orders in the fourth quarter were adjusted by 30%-35%; Qualcomm reduced its high-end Snapdragon 8 series orders by about 10%-15%. According to statistics, the total inventory of the top five CMOS suppliers of Chinese Android brands has exceeded 550 million.

The three major domestic mobile phone manufacturers OPPO, vivo, and Xiaomi have also notified suppliers that they will cut orders by about 20% in the next few quarters. Starting from March this year, domestic mobile phone manufacturers have once again cut orders by about 100 million units. At the same time, Samsung has also lowered its 2022 shipment target by 10% to 275 million units. Recently, it was revealed that the inventory of Samsung mobile phones in the channel has exceeded 50 million units.

The PC market has also been hit hard. Apple will reduce shipments of new machines by 10%, AMD will reduce orders for 7/6nm chips from the fourth quarter of this year to the first quarter of next year to 20 million pieces, and Nvidia will delay and reduce orders in the first quarter of next year because the mining craze has dissipated. As one of TSMC’s three major customers, such a big blow also caused TSMC’s stock price to plummet by 22.5 yuan on July 1, a drop of 4.7%, and its market value fell below 12 trillion yuan.

In addition, Micron, a major memory chip manufacturer, issued a statement on June 30 that due to a significant decrease in consumer demand, global smartphone sales in 2022 are expected to drop by about 5% compared with last year, and PC sales are expected to fall by as much as 10%. Therefore, the company is cutting production to cope with weak market demand.

Due to inflation, the conflict between Russia and Ukraine and many other reasons, the global market demand has declined, and the consumer electronics market has been the most affected. Mobile phone manufacturers have reduced their demand for mobile phone processors, mobile phone power management chips, CIS image sensors, display driver chips, storage chips and other chips in the mobile phone supply chain. In addition, the weakening demand for PCs and TVs has also directly led to a decline in the demand for related processors and display driver chips. This has also directly impacted the relevant processor and driver chip manufacturers, forcing them to cut orders and reduce prices in response.

In the past two years of global chip shortage, microcontroller MCU has been the most sought-after. Although the demand for mobile phones, PCs and other supply chain terminals has decreased, it has little impact on MCUs, causing prices to soar. Many MCU manufacturers have profited from it. For example, Taiwan's MCU leader Nuvoton's profit increased by more than 5.5 times last year, with a net profit of NT$7.27 per share; Holtek's profit also nearly doubled, with a net profit of NT$9.04 per share; and Sonix also achieved a new high of NT$8.71 per share. On the mainland MCU manufacturer side, GigaDevice's net profit reached 2.337 billion yuan last year, a year-on-year increase of 165.33%; National Technology's net profit was 219 million yuan, a year-on-year increase of 1849.09%.

In March this year, the delivery time of general MCUs began to return to the normal level of 8-12 weeks. At that time, the supply was still tight, mainly because MCU manufacturers and some channels and customers stockpiled goods due to the unstable international situation. The overall semiconductor inventory days have risen sharply from 96.2 days to 103.2 days. Among them, the inventory days of IDM companies have also increased from 104 days to 115 days.

As many chip manufacturers have experienced order cuts, the production pressure of upstream wafer foundries has gradually been released, and the production capacity of MCU has further increased, accompanied by an overall decline in the MUC market price. This is another key chip facing order cuts and price cuts after display driver chips, some power management chips, and CIS image sensors. Although the supply and demand of general MCUs have changed, the market demand for server, automotive and industrial control MCUs is still strong, and the prices of high-end products are still relatively strong.

The problem of insufficient and excessive chip production capacity will exist for a long time

According to surveys by multiple market institutions, the global chip shortage will improve in 2023, but it may be followed by overcapacity. The market underestimates the problem of chip manufacturers' profit deterioration caused by chip overcapacity in the next two to three years. The chip overcapacity will mainly impact pure wafer foundries such as TSMC, because if market demand shrinks, the consequence may be that some chips have too much inventory and price cuts.

In addition, due to the increase in core chip production capacity, the overall market is still digesting the previously scarce production capacity, so in the short term, the core chip performance of major manufacturers will maintain a positive trend. Take Qualcomm, whose revenue and net profit increased by more than 40% in the second quarter of this year, as an example. In its second quarter financial report of 2022, mobile phone chip sales reached US$6.33 billion, a year-on-year increase of 56%.

Although there is a phenomenon of order cuts in the mobile phone market, the production capacity of automotive chips and advanced process chips is still in short supply. Therefore, the problems of insufficient and excessive chip production capacity will coexist for some time in the future, and this situation will relatively offset the performance risks of chip manufacturers. As a major chip importer, China is believed to have a new turning point in the entire chip industry after it has been brought under control.

As a winner of Toutiao's Qingyun Plan and Baijiahao's Bai+ Plan, the 2019 Baidu Digital Author of the Year, the Baijiahao's Most Popular Author in the Technology Field, the 2019 Sogou Technology and Culture Author, and the 2021 Baijiahao Quarterly Influential Creator, he has won many awards, including the 2013 Sohu Best Industry Media Person, the 2015 China New Media Entrepreneurship Competition Beijing Third Place, the 2015 Guangmang Experience Award, the 2015 China New Media Entrepreneurship Competition Finals Third Place, and the 2018 Baidu Dynamic Annual Powerful Celebrity.