With disruptions across the semiconductor supply chain, can electronic and semiconductor players still grow their top and bottom lines?
Time flies, and it’s now halfway through the year.
We had just concluded the mid-year review of the Singapore banking sector as the lenders grapple with rising interest rates.
It’s time to turn our attention to the semiconductor industry as it is responsible for powering the devices that we use daily – our cars, computers, smartphones and laptops.
There is a bunch of companies listed in Singapore that cover the spectrum of semiconductor chips, components and testing services for their clients.
These include AEM Holdings Ltd (SGX: AWX), UMS Holdings (SGX: 558), Micro-Mechanics (Holdings) Ltd (SGX: 5DD), blue-chip Venture Corporation Limited (SGX: V03), Global Testing Corporation (SGX: AYN), and Frencken Group Limited (SGX: E28).
Let’s delve into the demand and supply angles to determine if the companies above can still grow.
A dire warning
Earlier this month, major chipmakers sounded a dire warning.
Both Micron Technology (NASDAQ: MU) and Advanced Micro Devices (NASDAQ: AMD), or AMD, signalled that the two-year global shortage was easing.
The reason?
Surging inflation and weaker economic growth are responsible for hitting the brakes on consumer demand and corporate spending.
In particular, Micro had forecasted a worse-than-expected revenue for its current quarter and remarked that the market had “weakened considerably”.
AMD highlighted a slowdown in personal computer sales last month after two years of strong growth.
Demand remains resilient
While the two chipmakers’ warnings sound alarming, it’s important to put things in perspective.
2020 and 2021 saw a big jump in chip orders as huge numbers of people embraced the internet and went online. Numerous businesses were also pushed to digitalise to survive in the wake of the pandemic.
Companies that benefitted from this surge had it good for two years and are now seeing the effects moderating, leading them to report that sales and demand had “slowed”.
Coming off a high base, it’s not surprising that companies such as Micron and AMD are sounding an alarm.
On the flip side,Taiwan Semiconductor Manufacturing Co (TPE: 2330), one of the world’s largest microchip manufacturers, signalled this week that demand is holding up.
It reported revenue that exceeded analysts’ expectations, while Samsung Electronics (KRX: 005930) announced a better-than-expected 21% year on year jump in revenue.
To figure out the true picture, let’s take a look at some indicators on the supply side.
Snarled supply chains
In the medical technology (MedTech) sector, there is still an acute semiconductor shortage.
A survey conducted in April this year revealed that almost 80% of the respondents reported longer lead times for products to arrive, leading hospitals and healthcare institutions to look for alternative sources and products.
Over at the automotive sector, the shortage of semiconductors plaguing the industry is unlikely to be settled this year, according to the CEO of Mercedes Benz India.
The situation may only improve in 2023.
Meanwhile, SEMI, a global association of companies involved in electronics design and the manufacturing supply chain, now believes that the problem is more complex than initially thought.
While snarled supply chains are responsible for the lack of supply early in the pandemic, it’s now a problem of not having enough chips to manufacture more chips.
CEO of SEMI, Ajit Monacha, highlighted that the toolmakers for semiconductor fabs need chips themselves to grow capacity to supply chipmakers with the components to manufacture more.
The Russian-Ukraine conflict is worsening this problem as most of the materials needed come from Ukraine, and it will take months, or even years before new plants are up and running to ease the supply crunch.
Get Smart: A mixed outlook
From the above, it’s clear that demand remains high for microchips and semiconductors due to residual elevated demand from the pandemic.
However, supply chain problems could interfere with chip manufacturers’ orders, resulting in lower volumes.
These problems will, in turn, affect the Singapore-listed players that are supplying components or testing solutions to these larger players.
The good news, though, is that demand remains firm, as highlighted by the World Semiconductor Trade Statistics (WSTS).
WSTS projects that the global semiconductor market will grow by 8.8% year on year to US$601 billion.
With demand still high, the companies need to wait for the supply-side issues to sort themselves out.
It may take some time, but they should all eventually post higher sales and net profits.
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