Imminent Chip Sector Correction to Occur, Expert Says

The semiconductor sector is set for a significant slump soon, with or without the brewing trade dispute between the United States and China, according to a tech analyst from CLSA.

The ongoing tariff battle between the two economic powerhouses has had some influence on demand but there have already been warning signs of an impending slowdown, said Sebastian Hou, who is a semiconductor investment analyst, during the CLSA Investors’ Forum in Hong Kong.

Those signs include a lowering in memory chip prices and a buildup in inventory levels as well as a sluggish pace in demand from high-growth areas such as data center servers, automotives, and industrial, according to Hou.

“In terms of the trade war impact, certainly there is some impact on the potential on the demand side but even without the trade war, in fact, the sector  is going to go through this correction because (of) very high inventory across the supply chain,” Hou explained.

The correction is usually defined as a decrease of 10 percent or more for the price of a financial asset.

Other analysts have come up with similar predictions in the past weeks. Morgan Stanley analyst Shawn Kim remarked, after conversations with semiconductor buyers and sellers, that the environment for the memory market  has already becomes increasingly negative.

Some experts forecasted that trade tariffs could worsen the situation by taking up to 25 percent of semiconductor earnings.

Global semiconductor revenue in 2017 came in at $420.4 billion, registering a 21.6 percent from one year ago, according to Gartner, a research firm. That growth came largely from the memory chip market where undersupply pushed prices higher.

Gartner had predicted in January that global semiconductor revenue will return to single figure growth in 2018 “before a correction in the memory market results in revenue declining slightly in 2019.”

Predictions coming from Hou for the growth in the market were quite similar.

“Starting from the fourth quarter this year to fourth quarter next year…some quarters, some months, we’re likely to see negative year-over-year growth of semiconductor,” he stated. Hou said he expects close to zero percent growth in the sector 2019.

Development in new technologies like artificial intelligence, the fifth generation of mobile networks, and the so called IoT (Internet of Things) could see demand in the semiconductor industry pick up again.

On the flip side, Hou warned over the developments in those technologies.

“A lot of them are still in the infant and early stage, so people have very high expectation(s),” he said. “I think that explains in the overbooking in the supply chain, that’s why there’s a lot of the inventory.”

Hou also predicted that once the cyclical downturn in the sector finishes, the semiconductor industry might even grow at a faster pace due to demand from various new applications.

However, the outlook may not be optimistic for many of the existing chip makers dominating the market like Samsung Electronics, Intel, SK Hynix, and Micron Technology since many of the key technology and internet companies are making their own memory chips to put into products and data centers.

Such companies “want to optimize their performance to differentiate themselves, so they have incentive to do that.” Hou also added that it’s a paradigm shift in the sector, where incumbents would see their market shares contract over the next 5 to 10 years.

FSMSmart gives you the latest news updates, market trends, and news about forex, commodities, stocks and many more! Open an account now and learn more about other investment opportunities on FSM Smart.