How the world went from a semiconductor shortage to a major glut

The semiconductor shortage that affected everything from cars to games consoles during the height of the Covid-19 pandemic has turned into a chip glut — and some of the world’s biggest chipmakers are taking a hit.

Semiconductors are tiny components that are integral to a slew of products including refrigerators, cars, smartphones and LED bulbs.

The Covid-19 pandemic caused huge disruption in the supply chains and production of chips, as consumers stuck at home went mad for products like PCs and smartphones.

This boosted demand for semiconductors such as the memory chips made by South Korean firms Samsung, SK Hynix and Micron.

There was also increased demand for less-advanced chips required for processes like power management in devices.

It led to a widespread shortage of products such as games consoles and even components for washing machines, which continued through the first half of 2022. There was also a lack of semiconductors that go into cars, leading to a drop in the production of vehicles from major automakers.

While the supply and demand dynamics for some chips have since become more balanced, in other areas, the chip shortage has turned into a glut.

Two types of chips are in oversupply right now: NAND and DRAM memory. These go into devices like laptops and also servers in data centers.

The glut came after companies began to stockpile chips amid the shortage to build up inventories.

But then the economy slowed down.

Demand for products like smartphones and laptops has dropped off in a big way — particularly as many people bought them during the pandemic.

“So, the makers of these end products stopped ordering chips and instead focused on selling through the inventory they already had,” Peter Hanbury, partner in the telecoms, media and technology practice at Bain & Company, told CNBC.

“This led to a strong ‘bullwhip’ effect for the semiconductor markers further back in the supply chain where sky high demand during the chip shortage suddenly dried up as end markets stopped ordering chips and instead focused on selling through the inventory they already had.”

Not all types of semiconductors are in oversupply, however, with demand for chips from the auto sector remaining strong.

Hanbury said that some chips made for specific purposes are not easy to exchange for other semiconductors, and so “their lead times and prices are improving but remain quite high.”

The pandemic-induced shortage of semiconductors helped boost chip makers’ profits as prices jumped. This included Samsung, the world’s largest memory chip manufacturer.

In an effort to boost the price of chips and reduce supply in the market, the major memory chip firms have announced production cuts.