After enjoying explosive growth in 2020 and 2021, the global PC market quickly encountered a lack-of-demand crisis in 2022, caused by the stacking impact of fewer WFH benefits, the Russian-Ukrainian war, the China lockdown, and inflation pressure. The supply chain is shrouded in a gloomy atmosphere of weak demand, high inventory, and sale downgrades.
The PC-related supply chain has gotten even more conservative regarding the second-half outlook for the year. The objective of clearing out the inventory as soon as possible has caused both upstream and downstream demand to noticeably slow down. For the IC design sector and product brands, the inventory clearance will last until 1Q23. Asus even stated that with the highly unpredictable global economy right now, the PC inventory adjustment period could last an entire year until 3Q23, an even longer schedule than many suppliers anticipated.
Intel experiences its first quarterly deficit in 30 years
Previously, major upstream suppliers Intel, AMD, and NVIDIA, along with end products, manufacturing, and retail were all optimistic that the PC market would continue its strong growth momentum. Yet the supply-demand reverse was quick and intense. Affected by the massive drop in PC demand and challenge from AMD, Intel’s 2Q22 revenue saw a 22% YoY decrease. After going through GAAP, a loss of US$454 million was reported, a significant decline compared to the profit of US$5.1 billion reported in 2021. The gross margin for 2Q22 was 36.5%, a notable decrease compared to 50.4% in 1Q22 and 57.1% in 2Q21.
In contrast, AMD saw a record 70% YoY increase in its second-quarter revenue. Besides continuing to take market shares in data centers and embedded systems from Intel and benefiting from the Xilinx acquisition, the impact of the PC demand drop is also clearly not as severe to AMD due to its PC market share still being far lower than Intel.
Graphics card leader NVIDIA’s latest reported revenue is only US$6.7 billion for the second quarter (ended July 31st, 2022) of FY2023, a nearly 20% QoQ decrease. Furthermore, NVIDIA also announced that it is designating US$1.32 billion to deal with inventory clearance and long-term purchase commitment. NVIDIA’s big revenue decrease is not only due to the PC market’s downturn. The most crucial factor is that with the mining trend fading, graphics card prices have fallen from their extreme peaks and thus no longer bringing in the same level of profit.
These three major manufacturers have all adjusted their PC market outlook for the year as well. Intel estimates a 10% annual decrease in global PC shipments. Both AMD and NVIDIA are even more conservative, with AMD estimating a decrease of around 15%.
Notebook shipment adjustments intensify
With the world moving into the post-pandemic era, education tenders worldwide have drastically decreased. Chromebook, which was the main pushing force behind the notebook boom in the past 2 years, flew the highest during the pandemic and has in turn taken the steepest fall in 2022. Notebook manufacturers have been downgrading their shipment goals, and Chromebook is one of the key factors.
It is estimated that in 2022, the global Chromebook shipment decline will increase to 55%, possibly up to 60%. In overall numbers, around 37-38 million Chromebooks were shipped in 2021. That number is estimated to drop to around 17 million in 2022.
Major notebook brands have already downgraded their Chromebook shipments. HP, which was the leader in 2021 with 10 million Chromebooks shipped, has adjusted its 2022 shipment goal to around 3.6 million units, a decrease of over 60%. The company that saw the largest decline in 2022 was Acer. Previously, Acer estimated that the decrease won’t be higher than 40%, but the latest numbers showed that it is now up to 75%.
Chromebook shipments in the past 3 years (m units)
Source: DIGITIMES Research; compiled by DIGITIMES Asia, August 2022
Gaming and business sectors unable to fill shipment gap
The conservative outlooks on the PC market from upstream CPU and GPU makers have also affected the launch schedule of new platforms. Subsequently, rumors about reduced orders and delayed shipments have been coming out of the upstream foundry sector.
Major PC brands have already adjusted their annual shipment goals several times since the start of the year, with the degree of decrease only getting more and more severe. In addition to Chromebooks, notebooks, desktops, and displays all saw major declines as well, because the slow demand from the gaming and business sectors was unable to fill the gap left by the consumer market. Several businesses have stated to the supply chain that the inventory clearance goal has been extended to 3 quarters.
Just as the supply chain rumored, Lenovo’s 2022 Chromebook shipments saw an annual decrease of over 50%. As with Windows notebooks, the hope is to keep the decrease under 10 % due to local advantages. However, the overall PC decrease has reached 15%.
HP is faced with a similar situation, with consumer notebook shipments decreasing by over 20% annually. Even though HP is fully dedicated to increasing the percentage of gaming and high-level business models, without the shipments seeing growth, the overall PC shipment for the year has slid by 15%.
Asus saw its notebook shipment reach 20 million units in 2021. Supply chain sources recently hinted that Asus has already downgraded the shipment for all production lines. The annual notebook shipment for 2022 could drop to 16-17 million units, with boards seeing an even larger drop in shipment and profits. Other PC shipments also saw major downgrades because gaming and business demand didn’t explode as expected.
Asus sees inventory surpass US$6.78 billion
After Acer and Asus revealed their latest quarterly performance and outlook, the market prediction that the global PC market will see a weak peak season in the second half and may not see an improvement in the first half of 2023 has essentially been proven.
Asus saw its 2Q22 profits drop by 80% and an inventory buildup that reached NT$206.1 billion (US$6.79 billion). The inventory turnover time has also increased to 180 days, higher than the 154 days in 1Q22 and 114 days in 2Q21. This meant that products are not selling well and inventory clearance is taking longer. For July, Asus reported revenue of NT$36.752 billion, a 33.72% monthly decrease and a 2.18% annual decrease.
Acer’s second quarter inventory was NT$63.442 billion (US$2.07 billion), a NT$417 million decrease compared to 1Q22. Despite the decrease in inventory value, the inventory turnover time has also increased, from 79 days at the end of the first quarter to 89.1 days. For July, Acer reported revenue of NT$17.458 billion, a 43.58% monthly decrease and a 33.11% annual decrease.
Percentage of inventory in revenue, PC supply chain sector
Source: Bloomberg, compiled by DIGITIMES Asia, August 2022
Slowed orders from major brands mark underwhelming peak season
Compal, the 2nd largest notebook ODM in the world, was expecting double-digit growths for 3Q22 after experiencing shipment lows in 2Q22 due to the China lockdown. However, with the third quarter performing weaker by the day, the estimation has slid down to single-digits. Besides Quanta, which is protected by its Apple MacBook orders, both Wistron and Inventec are leaning toward a more conservative 3Q22 outlook.
The second half peak season many ODM were looking forward to has come empty. The main reason is the clear slowdown in demand from the brands. Industry analysis pointed out that after the products finally landed after weeks at sea, the retail market discovered that the expected demand is not there, causing the inventory back to the brand factories.
Even Dell, which was originally quite confident in the market, has also halted its component orders and substantially reduced its ODM shipments. Dell has two main ODMs, Compal and Wistron, with Compal taking the brunt of the blow. Even though Wistron is not part of the order reduction, it has felt the effect. Hence its third quarter outlook has shifted from continued growth to staying level or even declining.
Compal CEO Martin Wong pointed out that in previous years, the ratio of 1H21 notebook shipments to 2H21 ones was around 45 to 55. However, in 2022, it will be 50 to 50. He added that in the past, the upstream and downstream sectors have different forecasts when it comes to shipments. Yet the two have come to a rare agreement about the yearly shipments, predicting a 20% decline compared to 2021.
Regarding 2023, Wong maintained a similarly conservative attitude. He believed that a lot of variables are involved, with the largest being inflation. This involves the inventory situation of the brands, with some having stocked up for 5 months. With the inventory clearance pressure and the first half generally being the slack season, a rebound may only occur in the second half of 2023.
It remains unknown whether or not the industry can rebound in 4Q22. Intel’s forecast stated that the third quarter is the darkest hour and the fourth quarter will be the light at the end of the tunnel. This forecast is seconded by Wong. Whether or not this forecast will come true still needs to be observed. The main factor will be the purchasing power of the western markets. Judging by the current brand sales, it’s still far from optimistic.
Dropped demand causes IC design sector to be burnt by inventory
The IC design sector is also faced with issues of sharp demand reversal from clients and rapidly rising inventory. In the first half of the year, the IC sector was hoping that high-level business and gaming models can increase both the quality and quantity of shipments, igniting growth for the IC design sector. In the worst-case scenario, it should at least maintain the basis for operation. However, the string of negative economic factors and the clarification of end-user demand, which was available after the previous logistics issues were lifted, have shown that PC and notebook applications are in full-blown decline.
In reality, the IC design sectors have generally understood in early 2022 that even if the actual end-user demand holds ups, it would be impossible to have an IC demand rush like the one in 2021. On top of that, it’s well-known that there were severe cases of overbooking among clients for the whole year of 2021. Thus, the sector was already relatively conservative regarding the annual shipment estimations. Despite all that, even the IC design sector didn’t foresee such a slowdown in demand for 2022. The previous, relatively conservative outlook is clearly not conservative enough, leading to companies further downgrading their shipment goals.
Many suppliers have admitted that back in the second half of 2021 when Chromebook sales started to weaken, they already had discussions with clients about whether or not to gradually adjust inventory. However, on one hand, a lot of retail channels were still unable to get enough inventory due to logistics issues. This meant that there was a lot of hidden inventory stuck in the logistics process, thus unable to do a reasonable assessment of the actual end-user market.
On the other hand, the demand for high-level models, especially business-use notebooks, has continued to grow. This gave the entire supply chain an expectation that the growth in high-level models can cover the reduction in consumer model demands, which is why they didn’t perform the inventory adjustment sooner.
With confirmation that the peak season is not performing well, the IC design sector, in general, is now at a stage where the goal is to help clients do inventory clearance and renegotiate the order scale, delivery date, and prices with upstream and downstream suppliers. The aim is to prepare for the regrowth after the storm passes.
The IC design sector has placed the inventory clearance timeline at around 2 quarters, hoping to complete the clearance by the end of 2022 and return to the regular demand cycle in 2023. Even so, this goal is still difficult to achieve. If the sales numbers don’t bounce back for the 2022 back-to-school and holiday seasons, the inventory will be cleared slower. From the client side, an increasing amount of claims has stated that it would be until the second half of 2023 before the market can recover. What’s more, the annual shipment for 2023 will only be about the same as 2022.
The end-user PC brands, manufacturers, and the component market are shrouded in a pessimistic fog. In all honesty, after PC leader Intel released its latest performance and outlook, it’s pretty much confirmed that the PC market will be in the trough for the next year. The inventory clearance will create a market where price discounts will be commonplace.
