Weakened demand from key smartphone and computer markets and an unfavourable pricing environment will lead to a 15% decline in annual sales for the global semiconductor industry, according to research from trade insurer Euler Hermes.
In its latest sector research report, Euler Hermes said that this will be the industry’s steepest drop in annual sales since the dot-com bubble burst in 2001.
While annual semiconductor sales increased by 21.6% and 13.7% in 2017 and 2018, respectively, this year’s steep sales decline could wipe out US$70 billion in revenue, the report said, adding that Euler Hermes expects the slump to continue into 2020, with a further sales contraction of 3%.
Aside from weakened demand, semiconductor companies are burdened with excess inventories and production overcapacities, leading to fierce price competition. With China-US trade tensions added to the mix, the semiconductor industry saw its monthly sales sharply drop by 30% between September 2018 and January 2019, the report said.
“Soft demand will maintain inventories at high levels while persisting trade tensions will further weigh on business confidence, leaving little room for a significant and general improvement in the pricing environment,” said Aurélien Duthoit, sector advisor for retail, technology and household equipment at Euler Hermes. “Even though smartphones have blossomed into the number one client for semiconductor companies between 2007 and 2018, we do not expect 5G take-up to be enough to accelerate smartphone replacement cycles under the current weather.”
Overall, the global semiconductor industry should still display healthy profit margins, positive cash generation, and low financial leverage, the report said. However, the sales slump will significantly increase risks for several types of companies in the wider electronics industry, including South Korean chipmakers, Chinese electronics assemblers, and American electronics retailers.