Insights: A new normal is dividing the global chip industry

Semiconductor stockpiles are at a record high, and a global economic downturn is unlikely to change that picture. But an increasingly tense geopolitical environment and continued supply chain friction is dividing the largest from other semiconductor manufacturers, which could impact how well they survive. The global shortage of some chips peaked in 2021 after clients that included carmakers cut orders only to desperately need them a few months later. At the same time, the popularity of streaming video services such as Netflix, which were forced to expand their server capacity, and greater use of gadgets from companies like Sony Group Corporation created competition for limited manufacturing capacity.

Inventory days, a measure of how long it takes to sell and replace stockpiles, have never been higher at dedicated chip foundries Taiwan Semiconductor Manufacturing Company (TSMC), United Microelectronics Corporation and Semiconductor Manufacturing International Corporation. Those three companies are ranked number one, three and five in global made-to-order market share – accounting for 67 per cent of the total. Data from Samsung Electronics, the second-largest foundry, isn’t analysed here because the company doesn’t provide data for its contract chip business. Data for fourth-ranked GlobalFoundries only dates back two years.

Digging deeper, we can see that manufacturers outside TSMC and possibly Samsung are still holding on to higher stockpiles as sales slow. At the end of June, inventory at TSMC, which accounts for around 55 per cent of the foundry market, was equal to 40 per cent of that quarter’s revenue. Its competitors collectively had a figure of 57 per cent. Even though semiconductor demand has not declined, it is weakening as consumers tighten their belts and companies including Apple freeze hiring or cut staff. Those chipmakers that focus mainly on older technology for mainstream use – such as components used in smartphones, computers and televisions – are seeing a more dramatic slowdown. TSMC and Samsung, the industry leaders, are enjoying more robust outlooks for their foundry services because they can offer clients superior manufacturing processes for higher-end applications like artificial intelligence and 5G mobile communications. This competitive advantage offers a greater financial buffer, reducing the risk of holding higher inventory.

Easing the danger for the other players are long-term supply deals including those made public in recent years by both UMC and GlobalFoundries. The latter last month announced a new deal with Qualcomm that guarantees a total of $7bn in revenue from the Californian designer of chips used in smartphones through 2028, slightly more than GlobalFoundries’s entire sales last year. While TSMC hasn’t disclosed similar agreements, assurances that its capacity will find buyers are somewhat implicit in the company’s business model and aggressive spending plans, with management repeatedly stating that the $100bn it’s investing over three years is based on consultation with clients in anticipation of their needs.

A raft of new policies, including a $52bn spending package from the US Congress, is aimed at making it easier and cheaper to expand capacity in America and Europe. TSMC, Samsung, GlobalFoundries and foundry newcomer Intel Corporation are all set to benefit. Yet investors remain unconvinced that all this spending will support earnings. Most foundry stocks have declined over the past year, even with continued double-digit revenue growth, in large part because the high rate of spending on new facilities heightens concerns that capacity will outstrip demand if a global recession hits. That’s a reasonable concern, since semiconductor sales tend to closely track macroeconomic indicators such as growth in gross domestic product. But the new normal – a sustained higher rate of stockpiles – is also likely to worsen the divide between the biggest companies with better technology, and other chipmakers who are highly dependent on demand for mainstream products.This changing landscape will likely mean that the strong get stronger, and the weaker struggle to hold on.

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