Chip Glut Ripples Through Industry

· The demand has fallen off because of the shift back to working in offices and things like that, and those companies, those manufacturers of PCs and phones and things like that, are sitting on huge piles of chips.

· So a lot of companies have frozen hiring, some have started layoffs like Intel. Qualcomm froze hiring.

· The chip industry is defined by its cycles.

· The last time that there was such a huge surge in demand was in the early 2,000s when mobile phones started taking off.

The chip industry is defined by its cycles. It's just a feature of demand for electronic devices that tends to be very up and down. People buy a lot of stuff, and then when economic times get worse, they decide not to buy the newest, best, latest model. So when those consumer buying patterns change, the chip companies just have to deal with the rut that results from that. So it just tends to go up and down a lot. This cycle has been historic in terms of both how high it rose and how long it lasted, and it came from a societal shift. People started changing how they acted, how they behaved, and they needed more chips and more electronics. So it's, in some sense, not surprising how high it went and how long it lasted, but it's been a couple of decades since there's been such a huge wave of rising demand that's boosted the fortune of chip makers and now, with the downturn, it's turning the other way. The last time that there was such a huge surge in demand was in the early 2,000s when mobile phones started taking off. So it's been since then we've seen such a big surge.

The chip industry is going from an environment where everything was in shortage and there was just sky-high demand, to a more fractured industry where consumer device-linked types of goods and the chips that go into them are going downhill very fast, but certain other pockets in other industries are still very strong, like automotive. Some things like industrial automation and things like that, those things are still moving forward pretty quickly. So it's become more of an up-and-down industry and the auto industry is still very hungry for chips and, in many cases, can't get them, and we're still looking at production cuts at companies like Toyota because of these persistent issues with semiconductors. So it's not all a bleak picture for everybody.

So the funding from that, which is about $39 billion in the US for factory building grants for these chip makers, is coming in at a time when these chip makers are seeing declines in demand and a rough picture. No manufacturer wants to start building huge plants and increasing output at a time when the demand is very low. The fact is that these plants that people are planning, won't come online and start producing chips for a number of years. They're multi-billion dollar projects that just take a long time to build and develop. So there's kind of a disconnect between the shorter term and the longer term. Longer term, a lot of people think the demand for chips is going to double in the next decade or so to reach more than a trillion dollars of sales in a year, so the longer-term picture seems to be good. It's just about how are people adjusting tactically to the shorter-term stress in the market, and that's the balance that a lot of chip executives are trying to strike right now. How do they limit the capital spending they're doing in the short term, but still expand enough to reap the rewards of a rise in demand in the long term?