A supply glut and weak demand are already affecting prices. According to research firm Future Horizons, the price of memory chips has fallen by two-fifths in the past year. The price of logic chips, which process data and are not as easily replaceable as memory chips, fell 3%.
Chip buyers will eventually run out of stock. But then they may buy less than before. In August, Hewlett Packard Enterprise and Dell, two major hardware makers, hinted that demand from business customers was slowing. PC and smartphone sales had started to level off before covid-19 and this trend is likely to continue. Phone makers can’t always add more and more chips to their devices. For companies like Qualcomm, which makes half of its sales from smartphone chips, and Intel, which is gaining a similar share of PC chips, this is a headache.
The search for new markets
The chipmakers’ response was to bet on new markets. Qualcomm is targeting cars. In September, the company’s bosses boasted that it had orders for $30 billion from car manufacturers. AMD, Intel and Nvidia, another chip maker, are vying for cloud computing data centers where demand for chips is high. Intel is also expanding its semiconductor business for networking equipment and devices for the hyper-connected future of the Internet of Things. It is also entering the contract manufacturing business, hoping to gain market share from Taiwan’s TSMC, which is the world’s largest chip maker and a preferred contract manufacturer for fabless chip companies such as AMD and Nvidia.
However, these efforts now collide with geopolitics. Like their counterparts in China and Europe, US policymakers want to reduce their country’s dependence on foreign chipmakers, particularly TSMC, which makes 90 percent of the world’s most advanced chips. In response, the US, China, the EU, Japan, South Korea and Taiwan plan to subsidize domestic chip production to the tune of $85 billion a year over the next three years, according to Mark Lipatsis of investment bank Jefferies. This would provide quite a lot of additional capacity globally.