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Semiconductor slump 'worst in a decade'

29 May 2019

World's ten leading chip makers each report declining sales in key market for lasers and optical systems.

Analyst firm IHS Markit has declared the current slump in the global semiconductor market as the worst for a decade, after all ten of the world’s leading chip manufacturers reported declining revenues.

The sector, a key one for vendors of laser and optical systems used to pattern, mark, drill, trim, dice, and characterize semiconductor chips and wafers, was worth $101.2 billion in the opening quarter of 2019.

That represents a 13 per cent drop on the opening quarter of last year, the worst such decline since the second quarter of 2009, in the immediate aftermath of the global financial crisis.

Memory failure
This time around it is a rise in excess inventory and falling demand from key end markets that is to blame, reports IHS’s Ron Ellwanger. “Memory chips were the primary culprit for the sales plunge,” states the senior analyst, noting that Samsung suffered the largest drop in revenue amid plunging prices for memory chips.

The Korean electronics giant’s semiconductor sales have plummeted 35 per cent year-on-year, highlighting its exposure to the memory device sub-sector.

“The other memory-oriented companies in the top-ten also were heavily impacted by the downturn,” added Ellwanger. Third-ranked SK Hynix, another Korean chip maker, experienced a 26 per cent drop over the same period, while fourth-placed Micron, US, posted a 23 per cent decline.

The slump was felt equally across both main types of memory device, with overall sales of both dynamic RAM and NAND flash chips down by around a quarter on last year.

Chip makers focused mainly on logic devices have escaped that kind of impact, but even Intel, which deals almost exclusively in logic, reported a slight decline in chip sales. As a result, the Californian firm was able to regain its position as the world’s largest chip manufacturer from Samsung.

Meanwhile, Germany’s Infineon has managed to jump up the rankings of the leading vendors thanks to its strong presence in automotive applications. With its chip revenues down only slightly year-on-year, it has risen three places to stand at eighth overall.

Outlook slashed
Ellwanger’s industry report comes a couple of weeks after IHS colleague Myson Robles Bruce slashed his outlook for the global chip market. Rather than the prior expectation of a slight market expansion this year, he now predicts a 7.4 per cent contraction as total sales slip to $446 billion in 2019.

If accurate, that would also represent the largest contraction since 2009, when sales of semiconductor chips shrank 11 per cent. However, since then the chip market has more than doubled in value, as consumer and professional products incorporate ever greater semiconductor content.

“After the chip industry attained a heady revenue expansion of 15 per cent in 2018, many semiconductor suppliers in early 2019 remained optimistic that they could achieve modest growth this year,” said Bruce, who heads up research of the semiconductor value chain at the analyst firm.

“However, the chipmakers’ confidence quickly transformed into apprehension as they witnessed the depth and ferocity of the current downturn. The latest data indicates the semiconductor business now is destined for its worst year in a decade.”

While the current malaise will continue through the middle of the year, the IHS team does see something of a silver lining in the third quarter, as seasonal demand for high-end smart phones helps to drive demand for NAND flash memory.

Laser and photonics impact
The precise impact on the photonics and laser sector is difficult to ascertain, although the stock prices of key suppliers to the chip production supply chain such as Nasdaq-listed Coherent and MKS Instruments (the parent company of Spectra Physics) have slumped in value over the past month as predictions for 2019 were updated.

Since early May, Coherent has dropped by around 27 per cent, while MKS is down a similar amount since late April.

When reporting the company’s latest financial results on April 30, Coherent’s CEO John Ambroseo told investors that the microelectronics sector was experiencing a “lull” in demand, although that is largely a commentary on the displays element of the business, where Coherent is a key supplier of annealing lasers.

Ambroseo’s counterpart at MKS, Gerry Colella, said around the same time that the recent slump in the semiconductor capital equipment sector did appear to have stabilized – notwithstanding the ongoing trade tensions between the US and China.

Colella also pointed out the historic cycles of the chip market, telling an investor conference call: “There is always doom and gloom of the semiconductor industry. Even if we stay flat this year in semi, it will be the third highest revenue year in the company's history.”

“If I was Nostradamus, I'd give you great predictions, but I feel that generally it seems to be coming together,” added the MKS CEO. “When I look internally of the order rates, they appear to be pretty healthy at this point.”

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