Chipmakers remain on edge, even in an industry known for its roller-coaster cycles, as record sales surges appear likely to give way to worst declines in a decade, according to the top market research companies in India. When the pandemic hit, the semiconductor market experienced a massive run-up in orders, sending stock prices and sales to all-time highs. Although some hoped for a long-term boom, chipmakers now face a familiar problem: shrinking demand and growing inventory.

The dilemma dates back to the dawn of computing. The construction of a chip plant takes years, and they don’t always go online when they’re needed. Over the last few years, supply has been a problem. Even as recently as this quarter, automakers and other customers complained of a shortage of electronic components.

However, fortunes have turned quickly for the largest chipmakers. In many areas, Micron Technology Inc. warns that demand is evaporating fast, including more than 40% declines at Nvidia Corp.

On the same day Micron, the US’s biggest maker of memory chips, told investors that the semiconductor cycle was ending, President Biden signed the $52 billion Chips and Science Act to subsidize domestic production.

According to analyst Stacy Rasgon at Sanford C. Bernstein, it’s kind of darkly humorous. When the industry turns, the politicians will discover just how quickly shortages resolve themselves.”

Some of the biggest buyers of chips were personal computer manufacturers. Mercury market research reports that desktop processor shipments dropped to their lowest level in nearly three decades in the second quarter. In terms of total processor shipments, they experienced their largest decline since about 1984.

There’s a painful hangover from pandemic lockdowns, when the work-from-home trend sparked demand for remote workers Personal computers As well as other devices. Supply-chain snags made customers even more desperate as chipmakers raced to meet a flood of orders. Electronic device manufacturers were willing to pay any price for chips.

A recent downturn in consumer spending has resulted in what the industry calls an “inventory correction.” A similar downturn occurred in 2019, and it usually doesn’t last long.

Due to a weakening global economy, this one is expected to be particularly severe. The industry won’t rebound quickly if an inventory correction occurs as the economy slips into recession.

Governments from the US, Europe, and China are all subsidizing new factories and equipment this time around. In order to compete with Asian manufacturers, companies like Intel Corp. lobbied for the Chips legislation. As a result of sluggish demand, they are preparing to add new capacity.

SEMI, the chip equipment industry association, has predicted that 24 new large-scale plants, known as fabs, will be built by 2022. This is above the average of 20 that SEMI has tracked since 2014. In 2022, equipment spending will reach $117.5 billion, up 15% from 2021, a record for the industry. Next year, SEMI predicts that spending will rise to $120.8 billion.

Chip manufacturing has become increasingly precarious due to the high upfront costs. The only way to make a return on $20 billion plants is to run them 24 hours a day for a few years before they become obsolete. Because of the scale required to make that kind of investment, fewer than five companies have leading-edge technology. The majority of production is accounted for by Samsung Electronics Co., Taiwan Semiconductor Manufacturing Co., and Intel.

It was these companies that built their dominance by understanding the economics of the industry better than their competitors. By adding production lines at just the right time, they improved their supply chains.

This drive toward efficiency may be disrupted by an effort to build up chip production in the US and Europe, as an alternative to Asian manufacturing.

In the US and Europe, the industry is building duplicate supply chains, according to Fitch Ratings analyst Jason Pompeii. In contrast to the increasing efficiency the industry has enjoyed over the past decade, this transition is expected to lead to short-term periods of heightened revenue and cash flow volatility.”

Currently, the risk is “overinvestment in production capacity heading into an economic downturn.”

In the long run, chipmakers remain optimistic about demand. By the end of the decade, executives expect the industry to generate $1 trillion in revenue. They may well be able to justify their massive factory build-out.

Ultimately, no one knows what will happen, Rasgon said. Chips are the story of the industry.

“Everyone has a hard time forecasting demand,” he said. There are too many bulls and too many bears.