Semiconductor Industry Faces Uncertainty | Global ETS

A Long Winter Ahead

Nov 1, 2023News

 

Taiwanese chipmaker TSMC reported a 25% decline in third-quarter net profit, exceeding expectations, and expressed CEO C.C. Wei's optimism about a potential recovery in the semiconductor industry, anticipating a healthy growth year in 2024. Despite positive signals from leading companies, the entire semiconductor industry foresees a 19% decrease in global capital expenditures for 2023, reflecting uncertainty for 2024. The delayed anticipated recovery in the semiconductor industry is attributed to uncertainties around the Federal Reserve's interest rate hike cycle, prompting caution in investment expansion, and companies are proactively adjusting their cost structures to weather the prolonged industry downturn.

 

On October 19, Taiwanese chipmaker TSMC (2330.TW) reported a 25% decline in third-quarter net profit, surpassing expectations. The company's CEO, C.C. Wei, expressed optimism about a potential recovery in the semiconductor industry, stating, "We can expect 2024 to be a healthy growth year for TSMC," with the anticipation of outperforming the overall industry next year. However, Wei acknowledged the proximity to the market's bottom but remained cautious about the strength of the recovery due to customer apprehension stemming from macroeconomic weakness and China's gradual economic rebound.

In typical years, positive news from leading companies often signals an upswing. Nevertheless, the current climate of economic tightening has led even top-performing companies to exhibit substantial uncertainty about the present situation and reduce their capital expenditures for the year. Notably, not only one but the entire semiconductor industry foresees a 19% decrease in global capital expenditures for 2023 compared to the previous year, indicating a uncertainty outlook for 2024.

According to the S&P 500 Information Technology Sector Earnings Preview, only two sectors posted negative year-over-year growth in the third quarter of 2023: Electronic Equipment, Instruments, and Components (-12%) and Semiconductors and Semiconductor Equipment (-3%).

An article from The Wall Street Journal pointed out that all the gains in the S&P 500 this year have been driven by eight major technology companies. This observation aligns with the broader sentiment that many companies are currently grappling with challenges. Consequently, the key questions revolve around the predicaments these companies face, their sustainability, and when the dawn of a more favorable outlook will emerge.

An article from the Federal Reserve Bank of Boston, dated October 12, delved into the cash reserves held by small businesses and their capacity to endure the ongoing uncertainty. The article revealed that the excess savings accumulated by companies in 2020 and 2021 have been depleted. As a result, companies are pondering the necessity of acquiring foreign debt to support their operations, but concerns regarding high financing costs and ambiguous future expectations prevail. Additionally, the impending impact of rising interest rates on corporate investments remains a source of unease.

In late 2021, as the semiconductor industry entered a downward cycle, analysts initially expected it to reach its nadir by mid-2023, based on historical cyclical patterns. However, this anticipated recovery has been delayed this time around, primarily due to uncertainty surrounding the Federal Reserve's interest rate hike cycle, prompting companies to exercise caution in expanding their investments. Consequently, predicting the duration of this cycle has become contingent on forecasting the interest rate hike timeline.

Analysts from BlackRock noted that past decades of interest rate hikes by the Federal Reserve offer a rough estimate of the future. A pause in interest rate hikes is expected in the second quarter of 2024, if all assumptions are kept. However, the article emphasized that the past six interest rate reduction cycles were accompanied by four economic recessions. Many companies are now acknowledging this reality and proactively adjusting their cost structures and operations to weather this prolonged industry downturn with the utmost prudence.

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