Taiwan’s high-tech sector has been increasing capital spending this year amid reviving demand, but Standard & Poor’s yesterday said the still-weak global economy and aggressive spending could undercut the sector’s profitability.
The international ratings agency said most of the nation’s high-tech companies generally withstood the global recession better than expected, citing the recent recoveries of companies’ revenue and profitability to pre-crisis levels.
“But the uncertain pace of recovery in global demand and the risk of aggressive capital spending could dash firms’ hopes for sustained profitability,” Standard & Poor’s Ratings Services said in its latest report.
The report came after Taiwan Semiconductor Manufacturing Co (台積電), the world’s largest contract chipmaker, said last month it may raise this year’s capital expenditure beyond earlier forecasts of US$4.8 billion to meet surprisingly strong demand for electronics products.
The world’s two largest chip testers and packagers last month also announced increased capital spending this year to handle a growing number of orders from the US and China. Advanced Semiconductor Engineering Inc (日月光半導體) said it planned to raise capital spending by more than 50 percent to US$700 million, while Siliconware Precision Industries Co (矽品精密) expected an increase of about 45 percent to NT$21 billion (US$654 million).
“High-tech firms face difficult choices to meet demand projections with appropriate capital expansion plans,” S&P credit analyst Raymond Hsu (許智清) said yesterday. “Their credit profiles come under pressure if they pursue overly aggressive capital expansion strategies that result in higher debt usage and leverage.”
The report also cited worries that Europe’s sovereign debt problems could derail the global economic recovery and thus weaken demand, as well as rising labor costs and a strengthening yuan, potential headwinds that could hit the high-tech sector later this year.
“High-tech firms have weak bargaining power to transfer rising costs to their clients and a potential appreciation in the Chinese renminbi [yuan] could put further pressure on the high-tech sector’s profitability,” Hsu said.
S&P said smaller firms could be edged out over the next couple of years if they fail to adopt prudent cost-control measures.
ADDITIONAL REPORTING BY LISA WANG
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