Chip Makers Cut Costs as Pandemic-Related Chip Shortage Slump Supplants Demand

As the semiconductor industry slump continues to affect almost all aspects of the business, chip manufacturers have shifted their focus from increasing output to cost cutting.

In recent weeks, chip companies have instituted hiring freezes and layoffs, slashed capital spending plans, reduced factory output and warned investors of a stark reversal in their customers’ buying habits. This has led to a decrease in demand for chips, and these companies are feeling the effects.

Qualcomm Inc. is a leading technology company that designs, manufactures, and markets digital wireless telecommunications products and services. The company's products and services include CDMA and WCDMA technologies, mobile phones, and other wireless devices and services. Qualcomm Inc. is headquartered in San Diego, California.

A major mobile-phone chip maker has joined the cost-cutting chorus, saying it is curtailing spending in some areas and pausing hiring after giving a pessimistic outlook for its current quarter. "We are prepared and committed to making further reductions to operating expenses as needed," Chief Executive Cristiano Amon said.

Intel Corporation (INTC) is a publicly traded company on the Nasdaq stock exchange. As of December 2019, the company has a market capitalization of $242 billion. Intel is a leading manufacturer of microprocessors and other semiconductor products.

Last week, the company said it would lay off an unspecified number of staff as part of a dramatic effort to reduce costs by as much as $10 billion a year by 2025.

The company said it would run some factories less aggressively and defer some of the most costly equipment spending until demand warrants those investments. This comes as rival company Advanced Micro Devices Inc. said it was being cautious about hiring given slumping demand and efforts to control operating expenses.

As recessionary concerns continue to mount, tech companies are increasingly looking for ways to cut costs - from payroll to other operational expenses. This has been seen across the board, from online retailer Amazon.com Inc. to ride-hailing company Lyft Inc.

After two years of strong demand for computers, smartphones, cars and internet services that rely on chips, the chip industry is now facing a period of slower growth. This is due to the societal shift towards working and learning from home, which has been driven by the pandemic. While the chip industry is notoriously cyclical, this slowdown is longer and deeper than most people expected.

The macroeconomic environment has deteriorated, causing a shift from supply shortages to demand declines, according to Akash Palkhiwala, Qualcomm's chief financial officer. This is a unprecedented change that has happened over a very short period of time.

As the global economy slows down, companies are rethinking their capital spending plans. Memory maker Micron Technology Inc. announced in September that it would reduce its capital spending by 30% for its current fiscal year, down to around $8 billion. Intel followed suit, lowering its own expectations for capital outlays by $2 billion to $25 billion. Even Taiwan Semiconductor Manufacturing Co., the world's largest contract chip maker, recently cut its forecast for capital spending this year by 10%.

Some chip makers are bucking the usual seasonal trends. Electronics manufacturers typically stock up on chips ahead of the holiday selling season, but that hasn’t played out this year, according to Mr. Palkhiwala. “What we’re seeing is the opposite, so it does come as a surprise in terms of how quickly the environment changed,” he said.

The PHLX Semiconductor Index is down by more than 40% this year, almost double the decline in the S&P 500. This selloff has hit a number of chip companies, including Nvidia Corp., America’s largest by market value. Nvidia will report quarterly earnings later this month, and has warned about sagging consumer demand and the impact of U.S. chip export restrictions to China.

The strength of the boom is turning into extra pain in the current downturn. When consumers clamored for digital goods, many manufacturers responded by stocking up on chips to respond to demand more quickly. Now that consumers aren’t buying as many phones or PCs, manufacturers are running through those chip inventories rather than placing new orders. This is causing a lot of pain for manufacturers who are now stuck with excess inventory.

Qualcomm said that the negative sales outlook it issued this week was primarily driven by its largest customers having built up large chip inventories that they need to work through. This could take a couple of quarters to resolve, according to Qualcomm. AMD CEO Lisa Su said that the company is waiting for bloated inventories to reduce while preparing for a potential uptick next year.

Many chip executives are pessimistic about the near-term outlook. “We are planning for the economic uncertainty to persist into 2023,” Intel CEO Pat Gelsinger said on an earnings call last week. “It’s just hard to see any points of good news on the horizon.”

On Wednesday, Mr. Palkhiwala said that the company is assuming that the market weakness will continue through September of next year. Micron has previously said that it does not expect the oversupplied market for computer memory to stabilize until the beginning of next year.

Chip companies are being more cautious, but many executives say they are trying to balance the near-term trouble against their expectations for longer-term growth.

Renewable energy, electric vehicles, internet-of-things devices and augmented-reality glasses all require increasingly sophisticated chips, helping drive forecasts that the overall semiconductor market will about double in size by 2030, surpassing sales of $1 trillion.

The U.S. and Europe are offering huge new incentives for factory construction to attract more manufacturing and create jobs. In the U.S., a bill approved this year provides for $39 billion of incentives for chip-plant construction, plus tax breaks on manufacturing equipment purchases.

Sanjay Mehrotra, the chief executive of Micron, recently announced a new chip plant in New York, saying that the company could invest up to $100 billion there. This is part of Micron's investments for the second half of this decade. Intel is also continuing its long-term expansion efforts with projects in Ohio, Arizona and Germany that could cost hundreds of billions of dollars.

Even some of the chip makers that have been least affected by the economic slump are being more cautious about their spending and hiring. ON Semiconductor Corp., a chip maker that reported record third-quarter results this week and gave an outlook roughly in line with expectations, said it was controlling discretionary spending and slowing hiring. NXP Semiconductors N.V., a Dutch chip supplier to the still-booming automotive industry, said it was making similar moves despite reporting a 20% uptick in sales for the third quarter.