How COVID-19 is Affecting the Semiconductor MarketApril 26, 2020 by Shannon Cuthrell
How do semiconductor sales look as the first quarter of the year comes to a close? Here’s an analysis.
As March came to a close, the full extent of COVID-19’s economic blow came into view for many industries. The semiconductor industry — with its many essential companies working to aid in COVID-19 efforts and continue producing technologies that affect everyday life — is looking at small market dips in some regions and gains in others.
FactSet research estimates that S&P 500 earnings have declined by 10% year-over-year in Q1 2020, the first double-digit drop since 2009. For perspective, the five-year earnings growth rate is typically 6.3% on average. But how does the semiconductor industry fare in these conditions?
Going by FactSet’s metrics, four semiconductor market segments are likely to report a year-over-year revenue drop in Q1: Energy (-51.5%), consumer discretionary (-33.1%), industrials (-28.9%) and materials (-22.5%).
According to FactSet research, energy, consumer discretionary spending, industrials, and materials are among the top industries to see a decline in earnings for Q1 2020. (Image courtesy of FactSet, via Twitter)
A recent Semiconductor Industry Association report on February sales results noted significant month-to-month demand loss in the China market, revealing the earliest stages of the coronavirus crisis just two months ago. Though sales increased in Japan and Europe, profits slipped in China by 7.5%, 1.4% in the Americas, and 1.2% in the Asia Pacific and other regions.
It's no secret China is a major player in the semiconductor industry, claiming 60% of global semiconductor consumption. As such, the country's economic conditions are a key metric in studying the overall health of the semiconductor market. So far this year, the downturn in industrial production, fixed-asset investments, and retail sales caused China’s GDP to decrease by 6.8% compared to last year, according to the country’s National Bureau of Statistics.
Before COVID-19 rocked the world economy, industry analysts projected promising numbers for 2020, with the rollout of 5G products, increased vehicle industry production, and the release of new smartphones, PCs, and other consumer devices.
But that promise is now downgraded mid-pandemic—Gartner reports that 2020 semiconductor revenue is down by over 11%, equating to $55 billion in revenue lost. Before COVID-19, Gartner expected that 2020 would bring 12.5% growth. Now, the organization is expecting overall semi revenue to fall by nearly 1% this year.
However, some market segments are faring better than others. Demand for memory is still strong, and Gartner predicts that memory product revenue will occupy 30% of the total semiconductor market this year.
What’s Next in Q2 and Beyond?
So what do these market indicators mean for the future? According to the International Monetary Fund’s April 2020 World Economic Outlook, that all depends on whether or not the current social distancing and economic shutdown measures continue into the second half of this year. Assuming that the world goes back to normal around mid-2020, global economic growth will still fall to -3%, down 6.3 percentage points since January.
Further, if the pandemic doesn’t slow in the second half of the year, global GDP would fall an additional 3%. If these conditions carry into 2021, growth may fall by 8 more percentage points.
In the immediate future, semiconductor production is contingent upon global public health policy. If the industry cannot continue to operate as an “essential infrastructure,” supply chain shortages will reap consequences on the digital economy.
According to Statista, under the worst-case scenario that semi industry revenue drops by 12% or more in 2020, the technology supply chain as a whole would take three months to recover. More broadly, global tech demand would take 12 months to bounce back.
However, utilizing their strengths as essential companies, power-house companies such as Cree, Texas Instruments, Maxim Integrated, and RECOM among others are still operating and innovating, using their manufacturing lines and power engineering knowledge to aid in COVID-19 efforts.
Reacting to COVID-19 disruption, the Semiconductor Industry Association recently put out a statement calling on nations to prioritize semi supply chains in their COVID-19 containment strategies. But whether or not governments will heed this call depends on how the outbreak is taking shape in their countries.
Cover image courtesy of the Semiconductor Industry Association.