The semiconductor industry is experiencing a significant shift in demand, with the artificial intelligence (AI) sector driving growth while other markets struggle. Smartphone, PC, and data center markets have seen a decline in demand this year due to various factors such as a weak global economy, high inflation, and rising interest rates. This oversupply of commodity chips has resulted in major losses for chip giants Samsung and SK Hynix, with a combined operating loss of KRW 15.2 trillion in the first half of the year.
However, recent data suggests that the semiconductor supply glut may be easing. Production cuts and a less severe decline in PC shipments have contributed to this improvement. PC shipments decreased by 11 percent in the June quarter, a significant improvement compared to the 30 percent slumps seen in previous quarters. Similarly, the smartphone market is showing signs of recovery, with a decrease of 8 percent in cell phone shipments in the June quarter compared to 14 percent in the first quarter.
Gradual Recovery in Demand
According to Woohyun Kim, CFO at SK Hynix, demand for chips is slowly recovering. However, this recovery is mainly driven by promotions and low-end models in the PC market, which has limited impact on overall chip demand. Forecasts for PC and smartphone shipments this year have been downgraded compared to earlier predictions.
While demand for chips to support generative AI has increased since the launch of OpenAI’s ChatGPT, it still represents a small fraction of overall chip demand. This shift in demand towards AI chips has led to a reduction in corporate spending on servers, as companies prioritize investment in AI. Intel CEO Pat Gelsinger predicts that the inventory glut in server central processing units (CPUs) will persist until the second half of the year, with data center chip sales expected to decline in the third quarter before recovering in the fourth quarter.
Challenges in the Chinese Market
The slow recovery in China, the largest chip buyer in the world, is also impacting the overall outlook for the semiconductor industry. Both Samsung and SK Hynix noted that China’s reopening did not meet expectations in reviving the smartphone market. As a result, they have extended production cuts of NAND memory chips, which are widely used in smartphones to store digital data.
Texas Instruments, a major analog chipmaker with significant exposure to China, also faces challenges. The sluggish recovery in end-market demand has led to order cancellations from clients, impacting the company’s revenue and profit. China’s impact on TI’s business is substantial, accounting for approximately half of sales at the end of the fiscal year 2022.
Opportunities in AI
While some chipmakers face challenges, others are benefiting from the growing AI sector. Equipment manufacturers such as KLA Corp and Lam Research are early winners of the AI boom. These companies have forecasted quarterly revenue above Wall Street estimates, reflecting the demand for chip equipment in this sector. Lam CEO Tim Archer emphasized the significance of AI servers, stating that a 1 percent increase in AI server penetration can drive an additional $1 billion to $1.5 billion of chip equipment investment.
Furthermore, chipmakers are ramping up production of high-end chips specifically designed to support AI-related applications. SK Hynix reported that demand for AI server memory more than doubled in the second quarter compared to the first quarter. Additionally, its DRAM chips, which hold information from applications while the system is in use, sold at a higher price in the second quarter. SK Hynix leads the market in high bandwidth memory (HBM) DRAM used in generative AI, with a 50 percent market share, followed by Samsung with 40 percent and Micron with 10 percent.
The semiconductor industry is undergoing a transformative period, with demand shifting towards AI chips while other markets face challenges. The gradual recovery in demand for chips and the development of high-end chips to support AI applications present both opportunities and obstacles for chipmakers. As the industry continues to evolve, manufacturers must adapt to these changes to thrive in the new semiconductor landscape.
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