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Business trends

Chip sales dip for first time in 30 months on Chinese market slump

Shrinking demand from US tech giants also blamed

Semiconductor sales have slowed since the second half of last year. (Photo by Wataru Ito)
Semiconductor sales have slowed since the second half of last year. (Photo by Wataru Ito)

TOKYO/SEOUL -- The worldwide semiconductor market shrank for the first time in years this January as demand from U.S. technology leaders and China cooled.

Sales receded 5.7% on the year to $35.5 billion, according to World Semiconductor Trade Statistics. The figure, based on a three-month moving average, marks the first decline in 30 months.

A market that had previously expanded at a 20%-plus clip started losing steam in the second half of 2018.

U.S. tech giants Google, Apple, Facebook and Amazon.com had fueled the market growth through their investments in data centers. Competition to dominate the cloud data space drove consumption of memory chips.

But demand drastically shifted over two years, as shown by transactions between a major semiconductor supplier and an American tech giant. In 2017, the client wanted all inventory on hand, according to the supplier. By early 2018, orders were limited to volumes prescribed in business plans. In the second half of 2018, the client said orders would be tight through at least the third quarter of 2019.

WSTS forecast in November that 2019 memory sales would shrink slightly to $164.5 billion. Tech companies "had overinvested to take advantage of the Trump tax cuts," said a brokerage analyst, who sees a correction in that activity. The mounting pressure in advanced countries to safeguard personal data is also blamed for suppressing spending.

Servers, such as those in data centers, account for 30% of memory chip demand. Waning demand is responsible for flash memory prices plunging more than 40% in a year. Customers anticipating further price drops are holding off on buying, creating a vicious circle.

The other main culprit in cooling semiconductor sales is the Chinese economic slowdown. Premier Li Keqiang pledged at the National People's Congress this week not to jump-start the economy via a flood of stimulus. But the government work report he delivered features tax relief, looser financing and other stimulus measures.

Chinese industry's worsening demand for semiconductors puts the economic slowdown into sharp relief. "Demand from automobiles and factory automation has dropped precipitously," Renesas Electronics President Bunsei Kure said in February. On Thursday, the Japanese chipmaker essentially confirmed a Nikkei report by saying it was considering suspending domestic plants for up to two months.

Chinese semiconductor sales between November 2018 and January 2019 crashed by nearly 20% by value compared with August to October, according to WSTS. The news is a blow to chipmakers everywhere, since China accounts for 30-40% of a global semiconductor market that amounted to $469 billion last year.

The deflated cryptocurrency bubbles in Japan and China undermined the semiconductor market as well. Demand for chips by "miners" has all but vanished in the aftermath.

The same goes for the apparent pause in technological innovation. Global smartphone shipments are set to decline for a third straight year, according to International Data Corp. IDC sees them dropping 0.8% to 1.39 billion units this year. New flagship phones have been criticized for lacking radical new features -- a view that has contributed to longer device replacement cycles.

In the harsh business environment, chipmakers have held off on new investments. Samsung Electronics is postponing capital spending to boost DRAM production at the state-of-the-art Pyeongtaek facility south of Seoul. Toshiba Memory will delay installation of certain production equipment at the Yokkaichi complex in Mie Prefecture, Japan.

But the coming era of 5G wireless communications may offer a shot in the arm. A hundred times as fast as its predecessor, the fifth-generation technology could revolutionize applications from autonomous driving to telemedicine. Demand for logic chips would rise sharply.

An insider from the South Korean semiconductor industry says there is "no doubt" that 5G will grow the market in the medium to long term.

"If 5G spreads, the volume of data transferred worldwide will double," the source said.

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