TOKYO/SEOUL/PALO ALTO, U.S. -- Chipmakers like Samsung Electronics are now girding for a harsher earnings environment as they grapple with whether the long "supercycle" boom is giving way to a temporary correction or a full-blown contraction.
World Semiconductor Trade Statistics has downgraded its memory market forecast for 2019 to a 0.3% year-on-year drop from the 3.7% growth projected in June. It sees the semiconductor market as a whole growing just 2.6% instead of 4.4%. The overall figure was dragged down by memory, which accounts for roughly 30% of total demand.
This development has caught chipmakers' attention. Top player Samsung expects its memory business to fare worse in the October-December period than in the previous quarter, a vice president, Robert Yi, said in late October -- the first such decline in roughly three years. The South Korean company will also cut capital investment in semiconductors 9% on the year for all of 2018.
Although memory demand will grow in the medium to long term, "Toshiba Memory is debating how long this short-term correction will continue," said Yuji Sugimoto, a managing director at Bain Capital, which led a consortium of American, Japanese and South Korean companies to purchase the Tokyo-based chipmaker.
The chief culprits are a shrinking smartphone market, which accounts for 40% of memory demand, and concerns over Sino-American trade tensions.
Global smartphone shipments for January through September fell 4% on the year. Sales have soared since Apple released its first iPhone in 2007, but a lack of technological innovation since then and a saturated market have dampened growth prospects.
Semiconductors exported to the U.S. from China now face additional tariffs due to their ongoing trade war. WSTS also downgraded its 2019 growth forecast for the Americas to 1.4% from 4.6% on an apparent slowdown in investment for data center memory.
After hovering around $300 billion until 2016, the global semiconductor market expanded 20% in 2017 to more than $400 billion for the first time. Overall growth this year is expected to maintain momentum at 15.9%.
The semiconductor industry typically goes through two- to three-year cycles based on replacement of old devices and improved chips. But the rise of information technology companies like Google and the "internet of things" has sustained rapid growth over a long period to create the supercycle.
Operating rates at chip fabs worldwide remain above 90%, according to U.K. research firm IHS Markit. But profitability will suffer if factory activity declines from a drop in demand.
This supply-demand mismatch has sent the price of flash memory, used for long-term data storage, down more than 30% since the start of the year. China will also begin volume output of memory next year as it nationalizes the industry. As with the steel and shipbuilding sectors, excess Chinese supply is expected to throw the chip market into disarray.
Discussions at the Group of 20 summit, which kicks off in Argentina this Friday, could foretell what lies ahead for the semiconductor market. "Many clients are holding off on investment decisions" due to trade tensions, a chipmaker chief said.
Rapidly growing demand for chips in recent years has been fueled by the expanding data economy. Uses for semiconductors continue to broaden, and the spread of next-generation services will write the market's future.
A decade of American economic expansion has supported the semiconductor market's recent growth. The main drivers have been Google, Apple, Facebook and Amazon.com, which have invested in memory for data centers for the massive amounts of information they collect.
The data-based economy is also expected to continue growing as applications for semiconductors widen. Automated driving employs 5G wireless communications technology and sensors, and artificial intelligence requires a great deal of data processing. The data economy is expected to grow in not only the likes of the U.S., but also emerging countries.
Chipmakers are gauging whether the market can bounce back. Intel's interim CEO, Bob Swan, has called 2018 "a fantastic year for us and I think for the industry," making comparisons a little bit tougher heading into 2019.
"Chips for smartphones will grow again starting in 2020," said Matsutsune Yamaji, senior principal analyst at Gartner Japan.
Restrained investment is impacting a wide range of industries in the sector, such as semiconductor-manufacturing equipment and materials. Medium- to long-term market trends will likely be impacted by when next-generation services like the "internet of things" take off.