Chipmaker inventories hit record highs as oversupply concerns loom

On August 21, Nikkei Asian Review reported that as of the end of June, the total inventory of the world's nine leading chipmakers hit a record high of US$64.7 billion as companies quickly took action to increase production to alleviate the long-term shortage that has disrupted the supply chain in the automotive industry and other fields.

Digitalization and the rise of fifth-generation wireless communication technology have made chips an indispensable component across industries, and the epidemic has forced many chipmakers to suspend production in Southeast Asia. Although they have accelerated the expansion of production capacity, chipmakers are still struggling to keep up.

TSMC CEO CC Wei said that market demand for high-performance computers and automobiles exceeded expectations. TSMC optimized its production lines from January to June, during which the output of automotive chips increased by 30% year-on-year.

The global semiconductor shortage has also created a shortage of equipment to make new chips. Nvidia CEO Jensen Huang said on an earnings call on Wednesday: "We expect to continue to face supply constraints for much of next year."

As chipmakers expand their raw material inventories to drive production, total inventories at TSMC, Intel, Samsung Electronics, Micron Technology, SK Hynix, Western Digital, Texas Instruments, Infineon Technologies and STMicroelectronics are currently at historical highs. Among the seven companies that provided comparable data, the share of raw materials in total inventories has been steadily rising since March 2019, exceeding 24% as of the end of March.

Finished chips, meanwhile, have been flying off the shelves. Turnover rates typically fall when total inventory rises. But sales have been rising faster than inventory, with the turnover rate at 7.8 in the April-June period the highest in 18 months.

Samsung Electronics and other leading chipmakers have built record inventories, including finished products, work-in-progress and raw materials. Still, there are concerns that growing inventories do not necessarily accurately reflect actual chip demand.

For example, many automakers are now shifting from a JIT (Just in Time) strategy to maintaining backup inventory in case of supply chain disruptions.

“We may need to change the way we handle inventory, such as cultivating more chip suppliers,” said Seiji Kuraishi, executive vice president of Honda Motor Co.

Fujitsu General also increased its inventory of chips and other components and materials by about 20% in the three months to the end of June.

"We are securing more components even if it means larger inventories if the semiconductor shortage drags on," said Vice President Hiroshi Niwayama.

Chipmakers worry the situation could lead to oversupply.

“We have an order book that represents approximately two years of revenue,” said Helmut Gassel, Infineon’s chief marketing officer. “We expect some double sequencing, which as always cannot be quantified.”

Memory chips are already showing signs of a slowdown, with three major producers, including Micron Technology and SK Hynix, reporting steady declines in inventories.

Bulk prices for 4GB DDR, a benchmark for dynamic random access memory used in computers, remained roughly flat for the second straight month in July at about $3.20 per chip. Global shipments of smartphones, which require memory chips, also fell significantly in April-June.

“Supply of memory chips is likely to outstrip demand in the first half of 2022, leading to falling prices,” said Akira Minamikawa of Omdia.

Still, leading chipmakers continue to rake in profits. The top 10 companies by market value posted net profits of 30.3 billion yen ($276 million) in the April-June period, up about 60% from a year earlier and marking the sixth straight quarter of growth.

They are also looking to expand massively, primarily in logic chips. TSMC plans to invest $100 billion over three years. Intel has announced plans to build a $20 billion factory in Arizona.

But the chip industry has experienced major swings in the past, with excess capacity built up during boom times burdening manufacturers once the market cools. The expansions now underway will come online in two to three years, but that means they could eventually weigh on companies.