Chip glut has prices coming down while ‘chipmakers are hurting’: Analyst

Futurum Research Principal Analyst Daniel Newman joins Yahoo Finance Live to weigh in on how chipmakers are grappling with a glut of supply following a major shortage throughout the height of the coronavirus pandemic.

Video Transcript

PRAS SUBRAMANIAN: After a pandemic shortage that drove up the prices of everything from cars to dishwashers, chip makers around the globe are contending with the glut of supply. Here to break it down is Futurum Research principal analyst Daniel Newman. Daniel, so we saw Micron claiming its inventories are now well above target levels. What exactly happened here with this chip glut?

DANIEL NEWMAN: Well, just like we ended up in a shortage, nobody really expected so much demand to come on so quickly. And chipmakers weren't able to ramp up the inventory quickly enough. And so as that demand kind of swelled and stayed intact for more than a year following the initial pandemic, as people bought cars, gaming consoles, PC, servers in the data center, the same thing happened on the way down. We saw what happened with the Fed.

We raised rates. We see we're heading into a recession. Discretionary income is down. People's balance sheets at home are not as good as they were. And all of a sudden, all these companies that ramped up have all this extra inventory. And effectively, we don't have the demand we had. And so now the inventory is there, and prices are coming down, and chipmakers are hurting.

SEANA SMITH: And Daniel, we certainly have seen a number of chip makers respond and start to shift their operations or how they're approaching business over the coming quarters. Micron cutting 10% of its workforce as that demand drops. When it comes to these inventory levels, the fact that they are so swelled at this point, how long until those inventory levels, I guess, get to more appropriate or what is, I guess, considered a historic norm?

DANIEL NEWMAN: Yeah, we're hearing different things from different leaders in these companies. We've heard from Nvidia's leadership that it should be some time at the end of this quarter, which, for them, ends in January. We heard Sanjay Mehrotra of Micron say probably in the second half of this year. I think some of the specificity is going to go around, whether are they data center chips, are they automotive chips, are they gaming consoles, are they PCs.

Each of these have their own sort of boom and bust cycles, but of course, we're seeing sort of an overall bust cycle right now. I like the chip companies that are more centric to things like cloud data center and automotive. And those that are really heavily into gaming and PC, I think a lot of their demand got pulled forward. And you could see it a longer time. So that's why Mehrotra said second half of this year, Nvidia's gaming chips, parts of Intel and AMD, they're probably looking at second half or later before they really start to see normal demand come back.

PRAS SUBRAMANIAN: Hey, Daniel, so I covered the auto sector. And we're still seeing a lot of the chip crunch happening there across a number of automakers. You mentioned that it's specific to different sectors. What is it about these chips that the auto sector needs is just-- is not-- the industry is not actually pumping out enough of them?

DANIEL NEWMAN: Yeah, it's really interesting. The automotive sector depends a lot on these lagging edge semiconductors, which is 14 nanometer and above. These are often produced by the likes of Tower Semiconductors, GlobalFoundries. A lot of what we're hearing, the resiliency, the fabs being built are more of these newer leading edge. These are the 5 and 7 nanometer process.

So what's happened is we have all this demand peaking for automotive. You've got cars now that have more semiconductors in them than ever before, but we haven't really increased the production of capabilities like we're doing, and we haven't finished yet, but on a lot of these leading edge with the CHIPS Act. So we don't have the production capabilities to kind of get up to all this demand we had for automotive. And so we're still seeing car prices are still pretty high. Used car demand is still a little bit swelled. And all these chip makers are going to need to keep ramping up production to ever catch up on these automotive designs that are semiconductor intensive.

SEANA SMITH: Daniel, we heard from Intel CEO Pat Gelsinger back in October. And he said, quote, "It's just hard to see any points of good news on the horizon." We know that Intel then issued a muted outlook. They also announced job cuts. Do you see is there any reason to be optimistic about this sector heading into the new year?

DANIEL NEWMAN: Yeah, if you zoom out overall, it's really hard to see a world that isn't going to be accelerated by technology, whether that's supercomputing in AI. Whether that's the next generation of vehicles, data centers and the cloud, and the software that enterprises run to operate, all these things require semiconductors. Over the next 12 months, during a tight recessionary period, I believe companies are going to try to do more with what they have technology wise, which means less buying of PCs and servers, which means a tougher outlook in the short-term.

But in the long run, the amount of software, the digitalization of everything means more semiconductors. You really got to follow those boom and bust cycles. We are in a bust cycle that was accelerated by a crazy boom. But the semiconductor tends to run pretty closely with those economic up and downs. I think as we start to come out of this economic downturn, you'll see the semiconductor volume pick up in a big way, as it's going to be critical to the advancement of our infrastructure and of business.

PRAS SUBRAMANIAN: Hey, Daniel, so do you think that the CHIPS Act will kind of help that boom-bust, smooth it out a bit more? And who can really actually benefit in terms of the companies from that act?

DANIEL NEWMAN: Yeah, that's a great question. I mean, some of this demand planning, the supply chain issues that we have, the hyperdependency we've created with Taiwan, I mean, we definitely put ourselves in a bit of a difficult situation. We, of course, have great relations with Taiwan, but there's a lot of microaggression going on with China that's creating some discomfort. We've got some new tariffs and some new regulatory policy going against certain chips shipping over to China.

We need to bring more production here to the United States. We need to bring more production on the leading edge. We need to bring more, as I mentioned with automotive, on some of those lagging, older process technologies, 14 nanometer and above. I think Intel has got the biggest opportunity to benefit. But we're seeing Micron, IBM. I mean, TSMC is reaching out for money. And all the fabless companies can benefit from some of the dollars that are there for innovation, R&D, and design in the extension of the CHIPS and Sciences Act.

But I like Intel's prospects. If they can get policymakers behind them, this could be a good moment for Intel. But of course, TSMC has had so much success. It'll be interesting to see does our government back the Taiwanese manufacturer to do more leading edge here, or does more dollars go to Intel, which may be a good idea for the national security and resiliency that we are needing in the future.

SEANA SMITH: Certainly a number of stories to keep an eye on when it comes to the chip sector in 2020. Daniel Newman, as always, thanks so much for joining us here this afternoon.