The prospects for the Asian semiconductor industry remain bleak for the coming two quarters as the U...
The prospects for the Asian semiconductor industry remain bleak for the coming two quarters as the US slowdown bites, consensus suggests.
Following a year of strong growth in semiconductors, the industry has been hit hard by faltering demand in the face of weakness across the technology and telecoms sectors.
Nick Irish, investment manager at Schroders, says: "Last year was a fantastic year for the semiconductor industry in general. The industry grew by about 30% year on year, following a bit of a correction in the preceding two years.
"This peaked at 50% growth year on year in August, but by the end of 2000, earnings growth began to slow down." The slowdown of the US economy and its knock-on effects remain a problem for the industry.
"If you look at the US in terms of aggregate spending, it accounts for about 50% of the demand," Irish says.
Jane Martin, investment manager at Scottish Equitable is bearish about demand for semiconductors.
She says: "It is fair to say that the outlook is pretty gloomy for the next two quarters at least. We are not expecting a great deal of demand from the US, despite the Fed rate cuts. The worst is not over in regard to earnings warnings yet. A lot of analysts are behind the curve."
Irish is also concerned with the demand outlook rather than supply growth. With corporate belt-tightening looking likely to abound, he expects companies to focus more on internet infrastructure and e-commerce functionality rather than PC units.
"If you look at Hewlett Packard and Gateway's outlook statements, they have been particularly bearish. Typically PC growth would be 15-17%pa and that has been coming down over the last few months to around 10%."
The resultant surplus in semiconductor manufacturers will remain a problem for the industry Martin warns, pointing in particular to the Taiwanese foundries who stockpiled in mid-2000, when riding high on the crest of the demand wave.
No one knows the extent of the trough, admits Martin. Taiwanese foundry, UMC, was forced to cut its prices by up to 20%, while other companies have similarly been under mounting pressure to follow suit, she adds.
Irish sees a move to outsourcing as part of a long term trend for the sector, although only 10% of semiconductor production was outsourced last year.
According to Martin the move is logical. She says: "Companies talk positively about outsourcing across the industry. At the end of the day it is about who can be at the leading edge of design. It makes sense to go to companies like TMSC to outsource the foundry part. It enables companies to focus on their speciality, although outsourcing is not necessarily going to transmit into higher earnings."
Looking forward, Irish is more upbeat. "We need earnings to come down further, so in the second half of the year we can see re-accelerated earnings growth," he says.
On this basis, Schroders is looking to increase its weighting in the sector, believing there is some value to be had.
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