While the PC market can be described as a very mature, stable market through 2019, sales will skyrocket in 2020, to peak at 341 million devices in 2021. This includes desktops and laptops. Standardization will take place in 2022 and a total of 285 million devices will be sold, the center of gravity of which, contrary to tradition, will be in the first half of the year. You could easily dismiss this as a recovery to the normal trend after the end of the corona pandemic.
However, it only becomes interesting when we look at the numbers in more detail, at a quarterly level.
The chart starts with 2019, a regular year before anyone had even heard of the coronavirus. You can see a clear stair pattern: the first quarter is weak and sales are increasing quarter by quarter, to peak in Q4. This has been the usual pattern in the PC market for decades.
In Q1 2020, sales bottom out, hampered by the outbreak of the pandemic, but strong quarters follow. Although Q4 still shows recognizable peaks, the other quarters are almost flat. That shows that manufacturers at that time simply sold everything they could make.
Where Q4 2021 was still good for a new high with 92 million units, Q1 2022 is less successful for the first time compared to the same quarter a year earlier. Sales level off further during the year and even the traditionally successful fourth quarter cannot break that trend. Only 54 million desktops and laptops will be sold in Q1 2023, down from the quarter of the coronavirus outbreak and lower than in the years before the pandemic.
After falling for five quarters in a row, manufacturers are hoping for a recovery of the ‘staircase pattern’ and with it the usual seasonality in the PC market. If that doesn’t happen and shipments level off, or even fall further, we could be heading for the worst year for the PC market in decades. Then there is not only normalization after corona, but an extra dip that compensates for the extra sales from the corona period.
Consequences for manufacturers
It is not difficult to spot the negative trend in the financial news of hardware manufacturers. However, there are differences between different types of companies.
In addition to being a chip designer, Intel is also a manufacturer itself.
To begin with, I have listed the latest quarterly figures of the chip designers. That is often, but not always, equal to the first calendar quarter of 2023; some companies use different financial years. All numbers below are in (or converted to) US dollars.
Intel is the largest of those companies, but is also the only real manufacturer of chips. It is therefore by far the hardest hit; weak demand means idle factories that do cost money, and Intel’s IDM 2.0 strategy to start manufacturing chips for others is nowhere near enough to offset that. Never before in its 55-year history did Intel write such red numbers.
AMD is also losing money; for a similar number we have to go back to the pre-Ryzen era. In comparison, Nvidia and Qualcomm are doing fine. Nvidia mentioned in its most recent quarterly figures that although the sale of GeForce video cards yielded less, the server branch of the company continued to grow strongly.
Company
Intel
AMD
Nvidia
Qualcomm
Sales 11.72 billion 5.35 billion 6.05 billion 9.27 billion Profit -2.76 billion -0.14 billion 1.4 billion 1.7 billion Worst result ever since Q3 2016 N/A Q3 2020
Things are even worse with the memory manufacturers. Samsung is a huge concern, so the figures for the total agglomerate obscure it somewhat, but the company’s chip division recorded a loss of billions. SK hynix and Micron rely purely on memory products and are currently bleeding money: for every 100 euros of products that Micron sells, it loses almost 63 euros. For Micron this is the largest quarterly loss ever, at least for SK hynix this has been the case since the takeover of hynix by SK Telecom.
Company
Samsung
SK hynix
Micron
WD
Turnover 47 billion 3.77 billion 3.69 billion 2.80 billion Profit 0.47 billion -2.51 billion -2.31 billion -0.57 billion Worst result since 2009 2012 Ever Q1 2019
TSMC bakes chips just like Intel, but only does it for customers. They have to reserve and pay for their capacity well in advance, if only because the entire production process from wafer to final production sometimes takes months. In the event of a loss of demand from customer A, it can therefore redistribute capacity to customer B, who previously could not get all the chips he would like. The Dutch ASML is even further in the chain; it makes the machines that companies like Intel and TSMC use to bake their chips.
These companies experience less or no problems from the chip surpluses. While TSMC sees a decline back to early 2022 levels, it still has an excellent profit margin. ASML even recorded more turnover and profit last quarter than before.
Company
ASML
TSMC
Turnover 7.3 billion 16.5 billion Profit 2.2 billion 6.7 billion Worst result since N/A Q1 2022
More general electronics companies are also less active than the real PC brands. Apple seems to be affected by little more than the usual seasonality and Sony even managed to ship more than three times as many PlayStation 5s as in the same quarter of last year. If you zoom in specifically on Mac and iPhone sales at Apple, you will see them falling, but the increased turnover of services more than compensates for this.
Company
Apple
Sony
Turnover 94.8 billion 23.2 billion Profit 24.2 billion 0.96 billion Worst result since Q3 2022 Q4 2021
Finally, I was looking for a good example for the ‘hard core’ of the PC market, the self-builders many tweakers can count themselves among. I found that in Corsair: it sells many different computer components, has a large market share in most of the categories in which it operates and has been listed since 2020, which means that it has to publish its figures.
With the dawn of 2022, you will see the turnover of this company take a sharp dive, with the net loss in the second quarter rising to more than 50 million dollars. That is more than the highest quarterly profit that the company recorded in corona times. At this point, Corsair intervened firmly behind the scenes; also the one I switched with behind the scenes about new products suddenly stopped working. Since then, Corsair has been balancing on the edge of profit and loss with a slightly increased turnover.
How the manufacturers react to the situation that has arisen differs. Many American tech companies held layoffs to cut costs, while memory manufacturers such as Samsung, Micron and SK hynix in particular have reduced production in the hope of resolving the oversupply. Companies that do not produce themselves buy less and save on marketing expenses.
Incidentally, it is good to know that it is too simple to speak of an overall chip surplus. There is mainly an imbalance in the market, says Gartner analyst Gaurav Gupta an interview. “Some chips are abundant, other chips are not available.” So you can sometimes still have to wait months for a certain carwhile memory manufacturers are on such large inventories that they literally five months shut down their factories.
Consequences for the consumer
A nice consequence of the chip surplus for consumers is that prices are relatively low. Now inflation conceals that somewhat, but working memory and SSDs, for example, have never been as cheap as they are now. Particularly with old stocks, which by definition have become less valuable, a great stunt can be made every now and then.
The stocks of memory chips in particular are enormous.
This applies to a lesser extent to new hardware. Manufacturers have already taken into account the lower demand when producing it, so the surpluses are less large, and moreover it has been produced under the current circumstances when it comes to, for example, labor, freight and raw material costs. The intrinsic cost of that hardware is therefore higher.
Another way to respond to lower demand is to slow down the rollout of new products. For example, there was an unusually long three-month gap between the releases of the RTX 4070 Ti and the next lower-cost model, the RTX 4070. With AMD you can see that even more clearly; between the release of the RX 7900 XT(X) in December 2022 and that of the RX 7600, there was six months without new Radeon video cards.
Although the release of new products is put on the back burner by various manufacturers, almost all companies continue to invest heavily in the long term. Samsung even invested a record amount in R&D last quarter, which is more than ten times its net profit in the same quarter. Plans for new chip factories are being pushed through at full speed despite declining turnover, and probably also partly thanks to the subsidies from the EU and the US. And ASML’s filled order book also shows that confidence in the long term remains as high as ever.
In the shorter term, there is one sector that stands out because something really needs to be done: the production of dram and flash memory. If you compare the losses that companies such as SK hynix and Micron are now running against their turnover, you could quickly conclude that they are heading for bankruptcy. Fortunately, that is not too bad, because these companies are used to the ‘pig cycle’ that characterize their market. Surpluses (low prices) and shortages (high prices) alternate, so that losses in times of low prices are financed with previously made profits. But this cycle also dictates that prices cannot stay low forever; as we wrote last month, it is likely that memory prices are approaching their lowest point.
Schematic representation of a pig cycle. Translation by Tweakers. Original: WilfriedC below CC BY-SA 3.0
Conclusion
Actually, we are oversimplifying the situation in the title of this article, but hey, you have to do something within the limited number of characters. After all, there is no general surplus of chips: there are mainly stocks of the ‘wrong’, often older chips. At the same time, there is still more demand for specific types of chips than there is supply.
With corona as a kickstart, the adage for hardware makers for a while was that their sales simply equaled their production capacity; everything that was produced flew out the door. The sales figures of the past quarters are a bit of a shock, and they no longer miss their rock-hard effect on the financial figures. Depending on how the situation develops in the coming quarters, the correction could well be a lot more severe than the expected ‘back to normal’ after covid; then the high sales during corona turn out not so much extrabut (in time) moved purchases. Naturally, external factors such as the general health of the economy also play a role.
Still, manufacturers seem to be confident in the long run; only in the short term are introductions postponed and investments withdrawn. Companies that are building for the situation as it will be in five years’ time, such as Intel, Samsung, TSMC and ASML, continue to spend record amounts on R&D.
For the time being, the consumer can benefit from dirt-cheap memory kits and SSDs, but the fact that a manufacturer can also just decide to save the next CPU or GPU for a later moment is less convenient for the consumer. If the market does not recover in time and companies have to lay off employees or even go bankrupt, this can have disastrous consequences for the pace of innovation in the hardware market. At the same time, there are also new opportunities, for example due to the rise of AI. Manufacturers such as Nvidia in particular seem to be able to benefit greatly from this.
Bannerfoto: Yuichiro Chino / Getty Images
2023-07-08 06:20:20
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