Why Global Chip Demand is Slumping Amid Inventory Excess

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Despite global digital transformation, chip demand is reported to be weakening
TI’s forecast signals challenges in the semiconductor industry as automotive & industrial sectors grapple with excess inventory & shifting market dynamics

The semiconductor industry, a cornerstone of modern technology, has experienced significant market fluctuations since 2020, reflecting broader economic trends and technological shifts.

Valued at US$611.35bn in 2023, according to Fortune Business Insights, the global chip market is dominated by industry giants such as Intel, Samsung, AMD, TSMC and Nvidia.

These companies are at the forefront of chip design and manufacturing, supplying crucial components for a wide range of technology products.

However, the industry's volatility has affected sectors ranging from consumer electronics to industrial automation, with recent market fluctuations particularly impacting memory chip manufacturers like Micron and SK Hynix.

This means that as industries adapt to post-pandemic realities, the semiconductor sector faces challenges in aligning production with fluctuating demand across various markets, leading to inventory imbalances and shifting market dynamics.

However, the rise of AI and 5G technologies is expected to drive future growth, with Deloitte forecasting global chip sales to reach US$588bn in 2024.

Yet geopolitical tensions, particularly between the US and China, continue to impact the industry, leading to supply chain disruptions and an increased focus on domestic chip production capabilities in various countries.

This complex landscape is exemplified by Texas Instruments (TI), a major manufacturer of analog chips, which recently projected a fourth-quarter revenue forecast below market expectations, highlighting the ongoing challenges faced by the industry in navigating these turbulent times.

TI’s expectations of the chip market

TI has forecast fourth-quarter revenue and profit below analysts' estimates, signalling ongoing challenges in the semiconductor industry.

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The company projects revenue between US$3.70bn and US$4.00bn, falling short of the US$4.07bn average estimate.

This shortfall is attributed to weak demand in industrial markets and inventory buildup in the automotive sector, stemming from pandemic-era stockpiling.

However, despite increased chip content in electric and autonomous vehicles, weaker car sales have offset potential gains.

As the first major U.S. chipmaker to report September quarter results, TI's performance is closely watched as an indicator of demand across various industries.

The industrial sector impact and broader implications

The industrial market, which uses semiconductors for factory automation and manufacturing equipment, also continues to show reduced demand.

TI supplies chips for these applications, making its performance an indicator of broader industrial technology adoption.

The company expects a forecast that reflects ongoing market adjustments as industries realign their inventory levels with actual demand.

The ongoing weakness in the industrial market, which utilises chips for tasks such as automating factories, has contributed to the reduced orders.

This trend reflects broader challenges in industrial automation and manufacturing sectors as they navigate economic uncertainties.

As the semiconductor industry adapts to these market dynamics, companies like TI face the challenge of balancing production with fluctuating demand across different sectors.

The industry's performance in the coming quarters will likely depend on how quickly industrial and automotive customers can clear existing inventories and resume normal ordering patterns.

The current situation also highlights the interconnectedness of global supply chains and the ripple effects of inventory management decisions.

Automotive sector: chip market dynamics and inventory challenges

A particular industry that is facing inventory challenges, is the automotive sector, traditionally a stable market for semiconductor manufacturers.

During the pandemic, manufacturers accumulated chip stockpiles to prevent production disruptions.

Chief Executive Officer of TI, Haviv Ilan

Yet this strategy has now led to excess inventory, causing customers to reduce new orders while they manage existing stock.

According to automotive industry analysts, consumers remain cautious about vehicle purchases amid economic uncertainty.

It seems that as companies in various sectors work to optimise their chip inventories, the semiconductor industry must navigate a period of adjustment, potentially impacting investment decisions and production planning.

Looking ahead, the semiconductor industry's ability to recover from this demand slump will depend on several factors, including global economic conditions, technological advancements in key sectors and the pace at which excess inventories are absorbed by the market.

Speaking on a conference call after delivering Q3 results, Chief Executive Officer of TI,  Haviv Ilan, said TI’s biggest sales sources — industrial and automotive chips — are suffering from an excess of inventory.

He says: “We really need the broad industrial market and the automotive market to join.”

When asked to predict a rebound he replied: “It’s about time, but we haven’t seen it yet.”

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