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Trade war

Asian chip share rout provides strong indication of a tough 2019

Semiconductor industry braces for slowdown as trade war creates overhang

TAIPEI -- When President Jason Wang of United Microelectronics Corp. said on Wednesday that the world’s No. 3 contract chipmaker would keep a “very cautious” outlook on demand at least until early 2019, he was actually taking the words out of many investors’ and tech executives’ mouths amid the great uncertainties that have been brought by the escalating trade conflict between the world’s two leading economies.  

As if by prior agreement, executives from U.S. chipmaker Texas Instruments and French-Italian chip provider STMicroelectronics have also warned of softening demand for the current quarter. Meanwhile, American microchip provider Advanced Micro Devices and Swiss-listed optical chipmaker AMS, a key supplier to Apple and Huawei, both gave lackluster forecasts for the upcoming holiday season.

These views have mirrored by memory chipmaker Nanya Technology cutting spending for 2018 and Taiwan Semiconductor Manufacturing Co. (TSMC), the world’s biggest contract chipmaker, last week lowering its full-year growth goal for the third time this year.

On Friday, Manish Bhatia, executive vice president of American chip provider Micron Technology, joined in. “We have actually lowered NAND flash memory capex in the 2019 fiscal year that began last month compared with fiscal 2018,” Bhatia said in Taiwan at the opening event for a new facility, when asked whether the biggest U.S. memory chip provider would also cut spending to reflect market woes. Bhatia did not specify numbers. “We are responding to market conditions and we will continue to be flexible looking forward,” the executive said. Micron last month forecast that it would spend around $10.5 billion in fiscal 2019.

The cautious views from executives across the semiconductor industry -- which acts an indicator of the broader tech sector -- confirm an increasing pessimism about short-term electronics demand and a slowdown in investment that will cool a year-long tech super cycle. This fear has quickly spread across the chip supply chain, with related stocks taking a hit as investors retreat from the stock market to avoid political-related risk.

The current downwards trend in chip share prices could also have broader economic and market implications, according to analysts.    

“It’s likely that we are just seeing the beginning of the market turmoil as the semiconductor industry is often a leading indicator,” said James Wei, an analyst at Yuanta Investment Consulting. “The market could likely stay very volatile going into 2019 -- with a tough and challenging year ahead when there are few growth catalysts but plenty of uncertainty."

Micron has seen its share price drop more than 40% since its recent peak in May, while its smaller rival Nanya Technology’s shares retreated more than 55% over a similar timeframe. The shares of South Korean memory chip groups Samsung Electronics and SK Hynix have also fallen more than 12% and 19%, respectively, since July 26.

The chip material and equipment market is viewed within the tech supply chain as a barometer of future investment confidence. Shares of Taiwanese wafer material provider Globalwafers plunged 67% from May, while its bigger Japanese counterparts Shin-Etsu Chemical and Sumco declined more than 23% and 45% respectively since July 26. Chip production tool provider Applied Materials and Tokyo Electron have seen their shares fall more than 30% so far this year.

Mark Li, an analyst at Bernstein Research, said that in the face of uncertain future demand, companies and consumers first stop buying durable goods such as cars and production machinery. “That’s why chip demand for automotive and industrial applications have slowed first amid hazy macroeconomic conditions.”   

Some tech segments are more vulnerable than others. The mid-to-low-end smartphone market is on the decline and the downturn is continuing into the fourth quarter, UMC’s Wang said on Oct. 24.

MediaTek, the key mobile chip provider to midrange smartphone makers such as Oppo, Vivo, Xiaomi and Lenovo Group, has seen a 44% slump in its stock price since its recent peak in April. Shares of Renesas Electronics, a key automotive chip supplier, have declined more than 58% so far this year.    

“In the first half of this year, tech companies were worried about the tight supply of some crucial components like DRAM chips -- so they tended to place orders for more than they actually needed in the first half of 2018,” said Jeff Pu, an analyst at GF Securities.

“Now the overbooking issue is causing a problem as demand could very likely turn out to be weaker and the trade war uncertainties also bite," Pu said.

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