Global chipmakers like Intel and Samsung say the semiconductor market is nearing the end of its overstock problem, although the outlook for demand from customers outside of the AI industry remains bleak. Chip glut started to fall, mainly due to production cuts, and PC shipments fell just 11% in Q2 compared to a decline of thirty % in each of the two previous quarters.
Shipments of chips for smartphones, PCs and data centers have declined this year as customers cut costs amid a weak global economy, high inflation and rising interest rates. This led to an unprecedented chip glut and contributed to the world’s two largest memory chip makers, Samsung and SK Hynix, suffering a record combined operating loss of $12 billion in the first half of the year.
A slow recovery in demand from China, the world’s largest buyer of chips, is also clouding the overall outlook. Samsung and SK hynix’s expectations of a revival in the Chinese smartphone market fell short, leading to a further decline in the production of NAND memory chips widely used in smartphones. Analog chipmaker Texas Instruments, which generates half of its sales in China, is forecasting Q3 sales and profit to come in below Wall Street targets on a slow recovery in demand and canceled orders.
Nevertheless, experts are cautiously optimistic about the results of the first half of the year: According to the market research company Counterpoint, deliveries of mobile phones fell by only 8% in the 2nd quarter, compared with a decline of 14% in the first quarter. PC shipments are up, but mostly driven by promotions, mostly affecting low-cost models and having a limited impact on chip demand recovery.
Demand for generative AI chips is showing solid growth, but this sector still accounts for a relatively small portion of overall demand. Additionally, by prioritizing investments in AI, many customers are significantly reducing enterprise spend on servers and server processors. According to Patrick Gelsinger, CEO of Intel, the inventory glut for server processors will continue until the second half of the year, chip sales for data centers will decline slightly in the third quarter and a recovery in sales can only be expected in the fourth quarter.
Chip fabrication equipment makers like KLA Corp and Lam Research were the first to benefit from the AI boom. Both companies expect quarterly earnings to beat Wall Street estimates, which will propel their shares higher. “AI servers have more advanced logic, memory and storage compared to traditional servers. Each additional percent of AI server penetration will result in up to $1.5 billion in additional investment.” – said Tim Archer, CEO of Lam.
The demand for AI servers has also impacted storage providers. SK Hynix saw demand for AI server memory more than double in Q2 compared to Q1, which also pushed up the price of DRAM chips. The company leads the high-bandwidth DRAM (HBM) memory market with a 50% share of the HBM market (as of the end of 2022), with Samsung accounting for 40% and Micron 10%.