Semiconductor demand may bottom out as PC and appliance makers’ inventories fall

International Business News – Computer (PC) and home appliance manufacturers, the major customers of semiconductors, are accelerating inventory adjustments. Inventory turnover days for large global companies reached the shortest in 1 year in October to December 2022. Many believe inventory levels will return to normal in the first half of 2023 and that once-receding semiconductor demand is likely to bottom out. This has been a driving force for semiconductor stocks, with the Philadelphia Semiconductor Index up 19% from the end of 2022.

According to British research firm Omdia, the semiconductor market in 2022 will be 35 percent for information equipment such as computers, 28 percent for wireless communication products such as smartphones and 10 percent for residential products such as home appliances. Inventory movements in these industries will predict the direction of the semiconductor market sentiment, and the stock market is paying a lot of attention to them.

The first to compress inventories are computer manufacturers. If we take a simple average of the inventory days in local currency for Lenovo Group, Hewlett-Packard and four other companies, it was 84.1 days from October to December (partly from November to January), the shortest in 1 year. This is 4.1 days less than in July to September and 16.5 days less than the peak April to June.

ASUS Computer cut its inventory by 34% in the six months to the end of December, with quarterly inventory days of about 131 days, a reduction of about 45 days. The company said that “inventory will return to a healthy level by April to June 2023.” HP Chief Executive Officer (CEO) Enrique Lores believes that “from the end of February to April to the beginning of May to July 2023, (PC’s) circulation inventory situation will return to normal”.

Smartphone makers are also compressing inventories, with Xiaomi saying in November 2022 that it would “probably reach normal levels by the end of 2022 or early 2023. Efforts are underway (to cut inventory).”

Home appliance makers are also pushing to cut inventories. Three companies, including South Korea’s LG Electronics, cut inventories by nearly 20% to nearly 30% in the three months to the end of December, with an average inventory of 62.1 days, down 11.1 days from the previous quarter.

LG Electronics’ TV and other businesses (in late January) are now at normal inventory levels. Jonas Samuelson, CEO of Electrolux Sweden, said about retail store inventories in Europe, “White goods are returning to normal, while in other areas such as electronics they are still high.”

Large electronics foundries (EMS) are also showing signs of reducing inventories. The average inventory days of four companies, including Jabil, were 88 days from October to December, down 0.4 days from July to September, the first year-over-year decrease in about two years. Singapore’s Flextronics (FLEX) “obtained a long-overdue reduction in network inventory from total inventory minus former advance deposits from the end of the previous quarter” (Paul Lundstrom, chief financial officer of Flextronics).

Among semiconductor traders, the average inventory days for four companies, including Arrow Electronics, was 65.6 days in October-December, an increase of 2.4 days from the previous quarter and a smaller increase than in April-June (4.2 days) and July-September (3.7 days).

Many believe that inventory around the semiconductor supply chain will decrease significantly by the first half of 2023 to reach healthier levels (TSMC CEO Chieh-Chih Wei). Many also predict that semiconductor makers will also enter a recovery trend from the second half of 2023, with “semiconductors for PCs bottoming out in January to March” (Zifeng Su, CEO of AMD in the US).

However, if final demand growth is slow, semiconductor shipments will not fully recover. The focus will be on whether the Chinese economy can expand and whether the currently weaker corporate demand recovers.