According to Reuters, the global pandemic has triggered a supply chain crisis that has deprived everything from PC and smartphone makers to cars of the chips needed to produce their products. But from late May or, in just three weeks, everything suddenly changed due to high inflation, the latest COVID embargo in China and the war in Ukraine that curbed consumer spending, especially on personal computers and smartphones.

The chip shortage turned into an oversupply in some areas, which took Wall Street by surprise. By the end of June, Sumit Sadana, chief commercial officer of memory chip company Micron Technology, admitted that it would cut production as the market reversal caught Micron off guard.

As the U.S. chip earnings reporting season begins later this month, Dan Hutcheson, a chip economist at TechInsights, warned of more bad news to follow Micron's dire predictions. "Micron plows through with their honesty," he said.

Concerns about the industry downturn have hit chip stocks, with the Philadelphia Semiconductor Index down 35% so far in 2022, far outpacing the S&P 500's 19% decline.

The hoarding has made matters worse.

Just as nervous shoppers searched the aisles of supermarkets for toilet paper before the COVID-19 lockout, manufacturers stockpiled computer chips during the pandemic.

Before then, "just-in-time" manufacturing was the norm for fiscally conservative companies that ordered parts as close to production time as possible to avoid overstocking, reduce warehouse capacity and cut upfront spending. But during the pandemic, that practice shifted to what some jokingly call "just in case" chip hoarding.

"Hoarding is a signal that they think is critical until one day they see it and say, 'Why do I have so much inventory?'" says Hutcheson, who has been forecasting chip supply and demand for more than 40 years. "The situation is kind of like toilet paper."

Experts say the U-turn in chips is manifesting itself differently in various business sectors.

Tristan Gerra, senior analyst for semiconductors at Baird, said large chip suppliers to consumer electronics makers, especially low-end smartphones, will be hit the hardest by the recession.

Gerra said chip design giant Nvidia Corp, a design giant whose graphics chips are used in gaming and mining cryptocurrencies, could see "another dip" as prices continue to fall, a situation exacerbated by the recent collapse in the cryptocurrency market.

Wedbush analyst Matt Bryson said those least affected by the oversupply are Apple's suppliers, such as TSMC, the world's largest chip factory, as demand for more premium Apple devices remains high.

Chip makers supplying automotive and data centers will also thrive, Gerra said, noting that demand continues unabated.

"In power management, we're going to shine," said an executive at another global chipmaker who declined to be named. However, for RF chips used in smartphones, "we're seeing a pullback in handsets," he added.

The executive's chip factory is "revamping" its production line to produce more automotive power management chips and fewer RF chips, he said, which could eventually help alleviate some of the automotive chip shortage.

Jefferies analyst Mark Lipacis said in a July 1 report, although industry executives and analysts can not say how many excess chips in global warehouses, but the first quarter inventory of major electronics manufacturing services companies hit a record high. The previous first-quarter record was more than two decades ago, just before the dot-com bubble burst.

Lipacis warned that manufacturers may decide to run out of chips in their warehouses rather than buy new ones and cancel orders.

Some analysts say auto chipmakers are safe for now. But that may not last long.

Bernstein analyst Stacy Rasgon said in a September report that automakers are ordering far more chips than they seem to need, and the trend continues, he told Reuters.

That will create problems when automakers stop buying chips to deplete their inventories.

Translated with www.DeepL.com/Translator (free version)