The worsening outlook for smartphone and consumer electronics demand would increase headwinds for semiconductor and component makers in the regional supply chain this year, Maybank Kim Eng Securities Pte Ltd said on Wednesday.
Investors should remain conservative on the tech hardware sector in the first half of the year until clearer signs of a recovery materialize, Maybank Kim Eng analyst Stefan Chang (張玄志) said in a research note.
“Weakening iPhone and Android smartphone demand is not news, but some recent developments and our supply-chain checks suggest that the decline is accelerating. What concerns us more is that the demand meltdown is not limited to smartphones, but has extended to other consumer electronics,” Chang said.
As a result, foundries that focus on 7-nanometer (nm) process technology or supply 200mm (8-inch) wafers are not expected to fully utilize manufacturing capacity from late in the first quarter, while suppliers of smartphone components are likely to see annual sales growth remain negative during the first half of the year, he said.
The analyst’s warning came as Apple Inc on Wednesday cut its first-quarter revenue guidance and attributed the revenue shortfall to lower than anticipated iPhone sales, particularly in China, caused by the macro backdrop and weaker than expected iPhone upgrades.
Maybank Kim Eng expects iPhone production volume in the first quarter to total only 38 million units, down 24 percent from a year earlier, with overall iPhone production volume for the year sliding by 16 percent year-on-year to 175 million units.
However, Fubon Securities Investment Services Co’s (富邦投顧) estimates an annual decline of only 9 percent to 47.5 million units in the first quarter and another fall of 6 percent to 39 million units in the second quarter, with full-year production dropping 7 percent to 195 million units, Fubon analyst Arthur Liao (廖顯毅) said in a note on Thursday.
Coupled with an already weakening demand for Android smartphones, most electronic component suppliers should expect an adverse impact in the first half of the year, if not for the whole year, Maybank Kim Eng said.
“The drops in utilization outlook for 7nm and 200mm capacity are the biggest warning signs to us of continued downward momentum in stock prices and supply-chain activities. The continuous decline in iPhone and Android phone demand also suggests that it is still too early to call a bottom,” Chang said.
Due to potential cuts in orders by customers amid soft demand, Taiwan Semiconductor Manufacturing Co’s (TSMC, 台積電) 7nm utilization rate might drop to as low as 70 to 80 percent this quarter and is unlikely to pick up before late in the second quarter, when production of Apple’s A13 chip is to begin, Maybank Kim Eng said.
“That TSMC has not fully utilized 200mm and 300mm capacity was well known, but that it has not fully utilized 7nm capacity is a new negative that we believe will lead to flat or declining sales year-on-year in not only the first quarter, but also the second quarter. Even if we optimistically forecast a year-on-year recovery in the second half of the year, TSMC’s sales this year will stay somewhat flat year-on-year in US dollar terms,” Chang said.
Meanwhile, the US tariffs on made-in-China electronic components remain an overhang for the tech sector, despite a 90-day trade truce between the two countries, leading more suppliers to prepare to shift part of their production lines outside China to mitigate the negative effects of higher US tariffs.
“Apart from component suppliers who have plans to relocate parts of their production facilities outside China, we see a trend of more handset components suppliers increasing new production capacity in India,” UOB Kay Hian Pte Ltd (大華繼顯) analyst Lee Yukkei (李玉麒) said in a note on Friday.
Another trend is the emergence of Internet of Things applications and automotive electronics, which are likely to be the next growth drivers for hardware makers on the back of advancements in sensor and device processor technology, as well as the launching of 5G technology and autonomous cars, Lee said.
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