Chip Shortage Not Great for Chip Makers Either

Lead times—measuring how long it takes between when a chip is ordered and when it is delivered to the customer—soared to an average of nearly 22 weeks in the third quarter compared with just over 13 weeks at the end of last year, according to Susquehanna analyst Christopher Rolland. He told The Wall Street Journal that he has never seen lead times this high since he began tracking the data in 2013.

The problem is even more acute in certain segments of the chip market. MCU controllers—a key component in automobiles—are now averaging lead-times of around 32 weeks, according to Susquehanna’s data. That is nearly three times the historical norm. As a result, car makers continue to cut production targets; market research firm IHS Markit reduced its light-vehicle production forecast for next year by 9.3% on Sept. 16.

And the end isn’t yet in sight. Ganesh Moorthy, chief executive of key MCU chip supplier Microchip, told an investors’ conference last month that “there is nothing that gives us a sense that between now and the middle of 2022 we would have any semblance of supply and demand coming into equilibrium.” IHS analyst Philip Amsrud doesn’t expect lead times to start declining until at least the first half of next year.

That would normally be a good sign for chip makers themselves, especially as the third-quarter earnings season gets under way. But semiconductor manufacturers are constrained by many of the same forces as their customers.

For instance, materials such as substrates—used to tie components of a single chip together—are in short supply. Micron CEO Sanjay Mehrotra told analysts on the memory chip maker’s fiscal fourth-quarter call on Sept. 28 that shortages of some components “will somewhat limit our bit shipments in the near term.” The company’s revenue projection for the quarter ending in November was nearly 11% below Wall Street’s forecasts.

The coming batch of earnings reports could therefore be a mixed one for chip companies. Growth is still expected to be strong; the 24 companies on the PHLX Semiconductor Index that have September-ending quarters are expected to report that revenue rose by an average of 23% year over year, according to data from S&P Global Market Intelligence.

But that is also a notable deceleration from the 38% average pace in the June quarter. Taiwan Semiconductor Manufacturing, or TSMC, is expected to show revenue growth of 19% year over year in U.S. dollars when it reports its results Thursday, according to analysts polled by FactSet. That compares with an average of 25% growth on a year-over-year basis over the last four quarters for the chip-making titan.

Investors are edgy. The PHLX index has lagged behind the broader market over the last six months on worries about the duration of the shortage and fears that chip customers are building up inventories that would cause orders to collapse once supply catches up. Christopher Danely of Citi predicts chip stocks will suffer a selloff as soon as lead times start declining.

The irony of today’s chip market is that happier customers won’t lead to happier shareholders.

Write to Dan Gallagher at [email protected]