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When the chips are down

The outlook for semiconductors

21 October 2020 |
Active ESG
After a challenging 2019, the semiconductor manufacturing sector was placed under even more pressure by the exogenous shock of the coronavirus pandemic. Yet the industry has staged an impressive recovery and our Global Emerging Markets team retains a positive long-term view on the sector, arguing that technology trends will quickly reheat any cooling demand for global chips.

Semi-positive: risks won’t short-circuit growth

Earlier this year, the coronavirus crisis threatened to cut short the rebound in the semiconductor sector. The chip industry had been showing signs of renewed strength before March, following the inventory correction in 2019 that was largely fueled by a data-centre glut and the brewing US-China clash over Huawei.

But while global semiconductor industry revenue fell slightly in the second quarter, the anticipated decline in demand has not materialised. Instead, demand has been boosted by strength in the infrastructure and data-centre sectors, while consumer-related segments have also started to recover – demonstrated by the pick-up in smartphone sales, which should quickly digest any excess supply.

Meanwhile, underlying secular technology trends remain stronger than ever and positive technology tailwinds are expected to lift the market throughout the rest of the year and into next. In fact, most observers suggest that the pandemic has boosted the tech cycle. Along with an acceleration in digitalisation during lockdown, burgeoning themes like 5G, artificial intelligence, intelligence amplification (IA), 3D-printing and high-performance computing continue to drive semiconductor demand.

The chip market is also supported by a thriving data-centre industry and the ever-increasing need for more efficient memory storage across devices:

  • Data centres. After a year-on-year slump in the first half of 2019, data-centre chip demand stabilised in Q3 and recorded a strong recovery over the following six months.
  • 5G smartphones. 5G devices may only replace older smartphones, but the higher-value product is expected to create incremental revenue growth for semiconductor manufacturers. Analysts forecast a decline in smartphone sales in the wake of the pandemic, but there is evidence that the recovery has been stronger than expected and the industry should record a meaningful rebound next year.
  • Memory and IA. Although the memory market was affected by excess inventories and a slower consumer cycle, Huawei’s aggressive stocking has corrected the imbalance between supply and demand. In addition, capital-expenditure cuts have helped control supply.

Escape to Taiwan: coping with coronavirus

As the first country to feel the shock from the pandemic, China’s manufacturing sector was initially more affected than that of many of its global peers (although it has since recovered). By contrast, Taiwan – which has considerably expanded its semiconductor market share over the past 20 years – held up well throughout the crisis.

Since the pandemic erupted, the island state of Taiwan has reported about 500 confirmed cases and only seven deaths1 – and has also managed to avoid strict lockdown measures. While the forecast for GDP growth in 2020 was downgraded from 2.4% to 0.5%, it is expected to resurge to 3.3% in 2021.2

In response to the pandemic, the Taiwanese government rolled out a fiscal stimulus package worth TWD1.05trn3 ($34.7bn) and set aside TWD50bn4 in funding for a voucher program to stimulate domestic consumption. The country’s central bank cut interest rates by 25bps, providing further insurance against a pandemic-led economic slump.

While supply-chain disruptions pose a threat, most Taiwanese businesses kept operating through the crisis, with no large-scale layoffs recorded to date. Many firms in Taiwan are even adding more staff, as production moves back from mainland China. In the wake of the pandemic, Taiwan’s unemployment rate only increased slightly to 4.1%5 – still below the 5.9%6 recorded in Hong Kong and 4.5% in Korea.7

TSMC: leading the pack

Most Taiwanese firms have incorporated the impact of the pandemic into their near-term forecasts. While many dropped their pre-pandemic guidance for 2020 in Q1 and refrained to comment on the likely full-year effect, as the year unfolded – and the outlook improved – many firms upgraded their outlooks for this financial year and next.

TSMC, along with a few other chipmakers, looks set to benefit from a couple of key developments in the chip industry. For one, the fabless manufacturer has been buoyed by the 5G revolution where its process technology has led the charge in the development of ever-smaller chip features. The company, which overtook US firm Intel as the undisputed global chip king in 2017, was also the first to bring chips that are seven nanometres (7nm) in size into high-volume production.8

In 2019, TSMC received another market boost when US semiconductor giant AMD selected the Taiwanese company as its new chipmaker. And more recently, Intel’s announcement that it missed a forecast deadline for 7nm processing prompted many industry analysts to predict that the US firm would soon outsource chip manufacturing to TSMC. Having AMD and Intel as clients should be beneficial and help ensure TSMC’s long-term sustainability.

Silicon peak: a positive outlook

Like all other sectors, the semiconductor industry was threatened by the March sell-off. After coming under pressure from oversupply and geopolitical tensions in 2019, the sector then struggled as economies locked down and supply blockages emerged.

Yet we believe that the drawdown was more due to panic than any fundamental weakness in the industry. And as the decline in demand failed to materalise, the sector has since rebounded. Moreover, the coronavirus crisis has ushered in a new era of digitalisation, which should trigger a significant rise in demand for the semiconductors that play a role in powering structural themes like AI, IA and high-performance computing.

While the industry is not immune to the coronavirus-related uncertainty the world faces, we ultimately see it as one that is uniquely positioned to benefit from the structural growth trends that are set to emerge in an increasingly digitalised post-virus world.


Risk profile

  • Nothing in this document constitutes a solicitation or offer to any person to buy or sell any related securities or financial instruments.
  • Past performance is not a reliable indicator of future results.

1‘Taiwan led the world in closing down for Covid-19, now it wants to do the same with opening back up’, published by CNN on 22 September 2020.

2CLSA, as at October 2020.

3‘Taiwan passes NT$1.05 trillion economic relief package’, published by the Taiwan News on 2 April 2020.
4‘Many takers for Taiwan government’s $2.3b cash voucher programme’, published by the Straits Times on 14 September 2020.
5‘Latest indicators’, published by National Statistics, Republic of China (Taiwan).
6‘Labour force’, published by the Census and Statistics Department, The Government of Hong Kong Special Administrative Region.
7‘Economically active population’, published by Statistics Korea.
8‘Celebrating one billion 7nm chips: why scale matters’, published by TSMC on 20 August 2020.

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