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ITAR1. "TSMC CEO Says 2024 Can Be a Healthy Growth Year as Industry Rebounds" - Reuters
2. "S&P 500 Information Technology Sector Earnings Preview" - S&P Global
2. "Semiconductor Industry Outlook Amidst Economic Tightening" - McKinsey & Company
A Long Winter Ahead
Nov 1, 2023News
Current State of the Semiconductor Industry
Strategies for Weathering the Downturn
Introduction
The semiconductor industry, despite optimistic forecasts from some key players, faces significant challenges amidst economic tightening and uncertainty. This article delves into the current state of the industry and explores the strategies companies are employing to navigate through this period of prolonged downturn.
Current State of the Semiconductor Industry
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 an uncertain outlook for 2024.
Impact on Technology Sectors
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.
Challenges Faced by Companies
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.
Prolonged Industry Downturn
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.
Strategies for Weathering the Downturn
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.
FAQ
- Q: What factors are contributing to the uncertainty in the semiconductor industry?
- A: Economic tightening, customer apprehension, and concerns about the impact of rising interest rates are among the key factors contributing to the uncertainty in the semiconductor industry.
- Q: How are companies navigating through the prolonged downturn?
- A: Companies are adjusting their cost structures and operations proactively, considering measures such as acquiring foreign debt, to ensure resilience amidst the prolonged industry downturn.
- Q: What insights do past interest rate hike cycles offer for the future of the semiconductor industry?
- A: Past interest rate hike cycles offer insights into potential future scenarios, emphasizing the need for companies to remain cautious and adapt their strategies accordingly.