Broadcom Tightens Strings on Supply Amid Global Chip Scramble

As the global chip shortage continues to wreak havoc on broad swathes of the economy from automobiles to consumer electronics, US semiconductor makers have been racing to supply as many chips as possible.

Broadcom is charting a different course through the chip-supply crunch. CEO Hock Tan said Thursday that the San Jose, California-based company is tightly managing where and what customers it sells to and that it is purposely sacrificing business to prevent surplus inventory from building up in the supply chain.

On a conference call to review its quarterly results, the CEO said Broadcom is working to carefully control what orders it fills so that customers that most urgently need its networking and other chips can get them. He said that it is not filling all of its orders in an attempt to avoid creating a glut of inventory. For Broadcom, the concern is that if it supplies too many chips to some buyers now, the demand will dry up down the road.

“We can show bigger numbers," Tan said. "But that means we will build up inventory in the wrong places and we need every one of those wafers in this environment, not just this quarter, or next quarter, or the quarter after, to ensure that our strategic customers are able to get what they need to launch and deploy products."

The comments came as Broadcom, which primarily sells networking-switch chips used in data centers and radio-frequency chips for smartphones, reported strong growth in its latest quarter. Its core semiconductor business came to $5.021 billion, up by 19% from a year ago, buoyed by demand in the cloud, broadband, 5G infrastructure, and wireless markets. Kirsten Spears, Broadcom's chief financial officer, said overall sales, including its growing software business, rose by 16% from the same quarter a year ago to $6.778 billion. 

Tan suspects that some companies are "panic-buying" chips to give themselves inventory for emergency use. He said that while some of the company's peers are willing to accommodate those orders, he is not.

“People are building up a buffer that is at a certain level of panic buying," he added. "Take that across all segments of the semiconductor market today, you see that kind of behavior unless you call key suppliers. We put in careful discipline to manage supply to where demand is needed, as opposed to where OEMs or even end-users are building up buffers."

The global chip shortage has bolstered sales at major US semiconductor firms over the last quarter. Last month, Nvidia said sales soared by 68% from a year ago, while Marvell, one of Broadcom's rivals, reported revenue growth of 48% over the last year, even as it was pressured to raise prices because of rising costs. Qualcomm, long the world's largest vendor of smartphone chips, said sales improved by 63% last quarter.

Broadcom sells networking-switch chips that are a vital part of data centers run by cloud computing firms such as Alphabet’s Google, Microsoft's Azure, and Amazon Web Services (AWS). The networking business jumped by 19% year-over-year to $1.8 billion, despite weaker demand from enterprises, where spending is in a state of recovery. One factor behind the growth was the rollout of routers used by telecos in 5G networks as well as market share gains in server networking cards also called NICs used in sprawling data centers.

It also highlighted its latest advances in networking switch chips, as it positions itself to tap the booming market for data center chips, it. For the fourth quarter, Broadcom said it sees cloud vendors upgrading to its Tomahawk 4 and Trident 4 switch chips that can transfer 25.6 terabits of data per second (Tbps), paving the way for 800G networks. It sells them with 512 lanes at 50G SerDes and the 256 lanes with 100G SerDes.

Tan said Broadcom is leading the pack in rolling out new product generations, as its engineers continue to "out-execute what is out there." He said that it is the only company supplying 100G SerDes switch silicon.

Its radio-frequency and other wireless chips are used in Apple’s iPhone and other smartphones, where sales soared by 35% from a year ago to $1.4 billion. In the fourth quarter, it said sales in the segment would grow by 33% over the last quarter (and 25% from a year ago), as it supports the launch of new 5G smartphones. The company is also a top supplier of chips used in cable set-top boxes, gateways, modems, and routers.

Even as customers pressure it for more chips, Broadcom said that it closed out the quarter with 16% more inventory than it started with, totaling $1.2 billion as it prepares to meet strong demand in its fourth quarter.

Broadcom and many other major US semiconductor firms rely on contract chip foundries to get their chips manufactured. But the surge in demand has caused severe shortages of many chips and a global scramble for the finite production capacity at foundries. Broadcom is one of the largest customers at TSMC, which is reportedly reading price hikes for its most advanced nodes 10% as companies pressure it for chip supplies.

"As far as our capacity for 2022, I think we have a pretty good supply availability lineup for 2022," Tan said. "In this environment, all things considered, we're feeling quite good."

Broadcom has previously said that it is almost completely sold out of chips for the remainder of the year, and it has also moved aggressively to make sure it is selling chips to customers that need them the most. Early in the year, the San Jose, California-based company moved to long-term, noncancelable orders for its chips, and Tan has said that policy has discouraged its customers from stockpiling inventory for future use.

He has said in recent quarters that its orders reflect actual customer demand and are not driven by buyers purposely ordering more chips than they actually need—what industry insiders refer to as "double-ordering."

“We are, to put it directly, shipping to exactly what we believe the demand requires," Tan pointed out. "We are trying very hard not to overshoot, building pockets of excess inventory within our ecosystem."

"We are projecting the momentum to continue in the fourth quarter,” he added. In the fourth quarter, he said that he sees revenue growth in its semiconductor business unit up a double-digit percentage year over year.