Over the last week, we’ve been following an emerging story on PC CPU shortages as a result of production shortfalls at Intel. Up until now, we’ve expected a relatively modest impact, but that might not be the case. According to a note from JP Morgan, PC sales could fall 5-7 percent in Q4.
A decline of that magnitude would wipe out the fragile improvement that first tipped up in 2017 following six years of declines. In Q4 2017, PC sales increased by 0.7 percent, even if the year as a whole ended down 0.2 percent. 70.6 million machines were sold in Q4 2017, so if we use those numbers as a baseline, we’d be looking at a decline of 3.53 million to 4.94 million units. That’s quite a lot of CPUs to come up short, and it’ll cut directly into the bottom line of multiple vendors. Q4 is also the worst quarter to hit a shortage in, given that PC sales tend to spike in Q4 due to the holiday season.
Gokul Hariharan, JP Morgan’s head of Asia Pacific technology research, writes: “our conversations with PC vendors indicate that the shortage, which started in small magnitude in 3Q, has been progressively worsening and is likely to have the maximum impact in 4Q18.” Hariharan believes the shortage will be worse in the high-end PC market, “where using AMD or older Intel family of CPUs as substitutes” is harder.
This is not great for the market, for a host of reasons. After six years of declines, the PC market is ill-equipped to absorb a further significant shrink, even if the decline is temporary. PC sales have fallen by tens of millions of units per year since 2011 and the market decline kicked off events like HP splitting in two and Dell going private. That’s not to say that a single quarter shortage will have anything like the same effect, but this is still an ugly shot for the market to absorb after taking a lot of body blows in the past six years.
IDC had previously reported that the PC market grew 2.7 percent in Q2 2018, the strongest growth rate since 2012 (though improvements in yearly PC sales have been impossible to come by). The larger risk for Intel, of course, is that this could spur adoption of AMD CPUs. Manufacturers with Intel orders they can’t fill will try and plug that hole elsewhere, and Intel will likely attempt to reserve its own highest-end parts for the market, to keep its revenue up. Intel has also stated that this issue is the result of increased product demand, though that explanation really doesn’t track — it’s no coincidence that Intel has slammed into capacity problems at the same time that its 10nm ramp has been so badly delayed. If 10nm had been ready to go on schedule, Intel would already be fielding an entire array of products on that node. It’s not clear if the 10nm delay is the sole cause of these issues, but the long lead times in the foundry business suggest it has to be part of the problem.
Intel has not changed its guidance on this issue over the past ten days and continues to rely on the following:
Customer demand has continued to improve over the course of the year, fueling growth in every segment of Intel’s business and raising our 2018 revenue outlook $4.5 billion from our January expectations. We will have supply to meet our announced, full-year revenue outlook and we’re working closely with our customers and factories to manage any additional upside.
If this issue is related to Intel’s 10nm ramp, it may take months to clear the shortage. Declining demand in Q1 / Q2 2019 (due to seasonality) and the beginning of the 10nm ramp in Q4 of next year may be what’s needed to finally solve the situation.
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