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Chipmakers Facing Dark Days as Middle Class Suffers

Neil lives in Canada and writes about society and politics.
Published: August 16, 2022
The chipmaking industry is set to be hit with a major downturn as demand from the middle class vanishes in inflation.
An employee works in the chip manufacturing process at a clean room of the Barcelona Institute for Microelectronics in Bellaterra, near Barcelona, on March 3, 2022. Multiple semiconductor giants have warned investors of hard times ahead as middle class demand vanishes amid inflation. (Image: JOSEP LAGO/AFP via Getty Images)

The chipmaking industry has finished its boom and is heading towards a potential bust as the middle class, which serves as the engine for much of the sector’s demand, suffers the consequences of inflation. 

One of the most apt examples is found in GPU maker Nvidia, which announced preliminary financial results on Aug. 8 ahead of an upcoming Aug. 24 earnings call that were less than stellar.

The firm warned investors that revenue was set to fall far short of the $8.7 billion forecasted, coming in with a $2 billion shortfall at $6.7 billion. And while that figure itself is already ominous, worse yet is that the company admitted that gaming revenue, their core business, had pancaked 44 percent sequentially and 33 percent year over year.

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Nvidia characterized the decline as “likely due to macroeconomic headwinds.”

The company also cautioned that Q2 results “are expected to include approximately $1.32 billion of charges, primarily for inventory and related reserves, based on revised expectations of future demand.”

Nvidia is not alone. Memory manufacturer Micron similarly cautioned investors in an Aug. 9 SEC Form 8-K filing that, “Recently, due to macroeconomic factors and supply chain constraints, we have seen a broadening of customer inventory adjustments.”

Micron warned not only that Q4 revenue was anticipated to fall to the bottom or below of their revenue guidance range, but that they “expect a challenging market environment in FQ4 22 and FQ1 23.”

The outlook as far out as Q1 ‘23 is murky enough that the company warned that “…bit shipments are now expected to decline sequentially, and we expect significant sequential declines in revenue and margins. We expect free cash flow to be negative in FQ1.”

The same day, Bloomberg reported that the chipmaker was slated to “slow hiring,” but noted that mass layoffs were not on the horizon, for now. 

However, the article carried the caveat that the clemency provided to staff, not only at Micron, but also at rivals Nvidia and Intel, may merely be temporary as a result of yet another Biden Administration stimulus package.

“In a typical downturn, chip companies have relied on layoffs to cope with sluggish results. But the industry just lobbied for passage of the Chips and Science Act, a landmark federal bill that will pump $52 billion into domestic semiconductor production. That’s made it an especially difficult [sic] for chip companies to be seen cutting jobs.”

Aug. 15 reporting by Bloomberg said that the sector at large had also been heavily impacted by economic conditions. Citing data from Mercury Research, the outlet noted that desktop processor shipments had actually dropped to their lowest level in almost 30 years.

“It’s a painful hangover following pandemic lockdowns, when the work-from-home trend spurred demand for PCs and other devices,” read the article, explaining that during the pandemic, consumers and businesses were willing to pay nearly any price for hardware they needed and wanted.

The excess demand naturally drove excess production, which, combined with 2021’s supply chain problems, has now led to an inventory glut plaguing the sector as conditions have shifted.

“Now consumers are cutting down on big-ticket purchases, and chip buyers are following suit,” author Ian King wrote.

As for the gravity of what lies ahead, Gus Richard, an analyst for Northland Securities, told King succinctly, “It’s going to be a bad downturn.”

Christopher Danley, a Citigroup analyst, was paraphrased as saying he “expects the industry’s drop to be the worst in at least a decade, and possibly two, and that “every company and every chip category is likely to suffer.”