21 Dec 2023 -

AI chips: boom-bust cycle?


The U.S. is intensifying its restrictions on AI chip sales to China, leading to sustained high demand and prices in the market, a situation echoed by Deliotte Insights. This scenario has caused a scarcity of AI chips in the open market, with prices remaining significantly high.

The U.S. ban has not alleviated supply pressures. Original Equipment Manufacturers (OEMs) have stockpiled these chips, and holders are hesitant to release them, resulting in a tight market, reports EPS News.

In spring 2023, advanced AI chips were fetching prices around $40,000 each. The shortage, primarily attributed to constrained advanced packaging capacity, has delayed the introduction of generative AI applications by numerous companies. The market imbalance is anticipated to persist well into 2024, with the generative AI market potentially reaching £50 billion by 2024 and possibly £400 billion by 2027, though Deloitte advises caution with these estimates.

The current market dynamics suggest the possibility of an AI bubble, particularly as supply begins to match demand. Deloitte warns of a potential ‘bullwhip effect’ in the supply chain, where overordering during shortages leads to surplus inventory once equilibrium is restored. As new capacities become operational, AI chip prices are likely to decrease.

Furthermore, Deloitte indicates that an increasing proportion of generative AI inferences may shift to edge processors, potentially impacting the market for data-centre generative AI chips.

AMD is ramping up its AI chip production, and China is advancing towards self-sufficiency in AI chip manufacturing, though high-end development remains a challenge.

The electronics supply chain is cautious about an AI chip bubble, with companies adopting AI technologies without clear strategic goals.

The excess inventory, resulting from non-cancellable, non-returnable orders during the shortage, is gradually being addressed. Prices, once inflated, are now under downward pressure due to the buildup of inventory. The market is expected to stabilise, but forecasting the exact timeline remains challenging, with new manufacturing capacities set to influence market dynamics in the coming years.

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