Excess Inventory is Supply Chain’s Next Challenge

Semiconductor output increased during the pandemic, but the retooling and redistribution of essential products created supply chain chaos, experts report. As demand for mobile computing equipment grew exponentially, original equipment manufacturers (OEMs)  increased their forecasts, and now they are faced with massive inventories.

Now, with millions of products unsold, OEMs are canceling parts orders and delaying introducing new products until they can clear part of their extensive inventories.

According to Apple’s financial reports, the company’s inventory for the December 31, 2022 quarter was $6.820 billion, a 16.07 percent increase over the previous year. And Apple has been doing substantially well in the past few months. Other companies are facing severe inventory problems:

• Hewlett Packard Enterprise inventory for 2022 was $5.161 billion, a 14.41 percent increase from 2021
• Intel’s inventory rose to $13.224 billion, a 22.72 percent increase from 2021
• AMD’s inventory for 2022 was $3.771 billion, a 92.89 percent increase
• NVIDIA inventory on January 31, 2023, was $5.159 billion, a 98.04 percent rise in 12 months,
• NXP Semiconductors inventory for 2022 was $1.782 billion, a 49.87 percent increase from 2021.

According to Intel’s latest annual report (10-K), the large inventory was one of the main culprits of the substantial reduction in gross margin compared to the previous year.

“Original equipment manufacturers and external electronic manufacturers alike are suffering from high inventory levels that are threatening their competitiveness,” said global management consulting firm Kearney. “Macroeconomic disruptions have ushered in a fundamentally different environment for technology supply chains with an average increase of about 27 percent in total inventory levels from 2019 to 2022.”

Distributors’ inventories have also increased, but top-tier global players Arrow Electronics Inc. and Avnet Inc. report that component makers aren’t stuffing the channel. OEMs and other end-customers are pushing orders out, Avnet CEO Phil Gallagher told analysts during a recent earnings call. But neither distributor is seeing cancellations spike.

Gallagher said the channel is undergoing an inventory correction that could last several quarters. Customers placed orders well in advance during the height of the semiconductor shortage, but demand, particularly in the consumer arena, has dropped off.

Economic factors

The Covid-19 pandemic caused a radical shift in electronic products and components manufacturing, including semiconductors.

Last month, Samsung Electronics reported a 95 percent drop in first-quarter profits as demand remained sluggish in the face of inflation and higher interest rates. The company mentioned that the reduced demand for memory chips was the main reason for the poor quarter.

The company’s semiconductor division suffered billions of dollars of losses in the first three months of this year as the slowing global economy cut demand for chips. “A demand recovery is likely to be limited by conservative investments, mainly from hyperscalers, and continued inventory adjustments by customers,” the report said.

The memory chip low-demand will likely continue in the second quarter as inventories remain at record levels, putting additional pressure on pricing. “Memory demand dropped sharply . . . due to the macroeconomic situation and slowing customer purchasing sentiment, as many customers continue to adjust their inventories for financial purposes,” Samsung said.

SK Hynix, the second-largest memory maker, also reported a record quarterly operating loss due to weaker demand for chips.

And last month, Micron Technology reduced its demand forecast for 2023. Micron said it needed help with losses from a high level of inventory. The losses are expected to decrease in the coming quarters.

Taiwan’s TSMC also warns that weaker-than-expected recovery in the consumer market is reducing demand for its high-end chips. “Inventory adjustment in the first half of 2023 is taking longer than our prior expectation and may extend into the third quarter this year,” said TSMC’s chief executive CC Wei.

Recovery to begin in H2

“The memory market, which is still under tough conditions, seems to be bottoming out,” Kim Woo-hyun, chief financial officer at SK Hynix, told the Wall Street Journal. “We expect some improvement over the first half,” he added during the company’s earnings call.

“Customer inventories are getting better, and we expect gradual improvements to the industry’s supply-demand balance,” Micron Chief Executive Sanjay Mehrotra said during a conference call.

And last month, Daniel Araujo, VP of Samsung’s mobile business, said he expects to see signs of a global economic recovery and easing inflation in the second half of the year. He forecasts the smartphone market to grow as people spend more again.

Exclusive of the memory market, semiconductor prices have remained firm. In the past, prices have declined as companies sell excess components into the open market. However, end-customers are holding on to their inventory, two distributors report, fearing another chip shortage.

Upgrades will wait until 2024

Many people who purchased new smartphones, tablets, and laptops during the pandemic are now waiting for next year to start considering renewing their devices.

Meanwhile, most manufacturers are delaying introducing new models in an effort to reduce current inventories.

For the supply chain of high-end chips, memory, and other consumer electronics components, 2023 could be a challenging year. The last quarter holiday season will be an indication of what we can expect for 2024.

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