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Is Semiconductor Industry Heading toward a Cyclical Downturn?

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Semiconductor industry faces potential cyclical downturn

For the fourth quarter, Texas Instruments (TXN) guided its biggest sequential revenue decline since 2012. It had a slowdown in demand across most of its markets. On its third-quarter earnings call, Dave Pahl, TXN’s head of investor relations, warned that after two years of strong growth, the semiconductor industry might see a potential cyclical downturn.

Rafael Lizardi, TXN’s CFO, said it’s not clear whether the weak demand is due to a cyclical downturn or is being influenced by macro trends such as the US-China (FXI) trade war. He’s not sure since TXN’s products aren’t directly impacted by the US tariffs on China. But if other companies report a weakness in demand, some investors might conclude that the US-China tariffs are slowing down the end demand.

STMicroelectronics (STM) and Microchip Technology (MCHP) both said they’re seeing a soft demand from Chinese customers.

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Impact on inventory levels

According to a Bloomberg article, Stifel Nicolaus analyst Tore Svanberg stated that tariffs will impact end demand. The uncertainty is discouraging businesses from stocking up on electronic components since they’re not sure if they will be able to use them. TXN, Taiwan Semiconductor Manufacturing Company (or TSMC) (TSM), and Micron Technology (MU) noted that some of their customers are making inventory adjustments in light of demand uncertainty. That has increased the three chipmakers’ inventory levels.

Chipmakers’ strategy to deal with the downturn

Chip manufacturing companies suffer the most during low demand. If they don’t produce chips, they have to bear the factory overhead cost. If they produce more chips, they risk increasing their inventory and making their products obsolete.

In this scenario, TXN stated it would slow down its production volume and only produce long-lifecycle products with a minimal risk of becoming obsolete. TSMC and Micron are expected to take this opportunity to shift their capacities to advanced nodes.

TXN, MCHP, and MU make generic chips. But specialized chip suppliers such as Intel and Advanced Micro Devices (AMD) are more vulnerable to demand swings and products becoming obsolete. We’ll look at that risk in the next few parts of the series.

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