As we enter May, we find we are living in un-precedented times with the global economy on the rocks due to the economic impact of the COVID-19 pandemic. The virus has spread to more than 212 countries in the world and with over 3.4 million confirmed cases worldwide over 240,000 deaths directly attributed to COVID-19, governments have been forced to react to stop the spread and impose some sort of restriction from strict lockdowns and shutting down of industries to increased testing and social distancing restrictions. By April 2020, almost a third of the world’s population were impacted by these restrictions and this has had a severe economic impact as businesses shut, supply chains break down as well as peoples consumer spending reduces.
The IMF predicts that even a short-lived outbreak will cause a 3% contraction of the world’s GDP (gross domestic product), lowering GDP in over 170 countries, and is predicting that Asia Pacific region will have zero growth in 2020 for the first time in 60 years. The US’ GDP is estimated to have shrunk -4.8% in Q1 2020, according to the Department of Commerce in US. Similarly, Europe’s GDP is estimated to have shrunk -3.8% in Q1 compared to last quarter, and Q2 could be even worse despite countries trying to lift some restrictions. Frances’ GDP is estimated to have shrunk -5.8% in Q1, the largest decline since records began in 1949 and the German government has said that it is on track for the worst recession since World War 2. In Asia, China, the first country to be hit, has reported that Q1 GDP contracted -6.8% in Q1, with industrial production dropping -8.4% compared to a year ago and retail sales falling -19%.
Many governments around the world are facing the difficult decision of how to keep their economies running at the same time not endangering their citizens by allowing the pandemic to grow further out of control and possibly prolonging the pandemic.
Growth in Data centre and Networking Sectors
In many countries, the lockdowns have severely impacted businesses with only essential services allowed to work and shops and restaurants ordered to close. In most countries, semiconductor companies have been defined as essential services and allowed to continue but difficulties have arisen over the supply chain and logistics. With many people staying at home, the world has gone online like never before, with a surge of around 30% in internet traffic which has benefitted data centre and networking sectors. The memory semiconductor sector is expected to be one of the bright spots in 2020 as demand for memory surges.
Automotive and Smartphones
Due to government restrictions on travelers, worldwide flights were down 70% at the beginning of Q2, with Asian and European flights down 80 to 90%. With people working from home, car travel has plummeted to very low levels in most countries, and roads and city centres are empty. One positive side of this reduction is that world pollution levels have dropped to levels not seen in many years.
All this has led to the major end markets for semiconductors being severely impacted. Almost all automakers have announced temporary shutdowns in plants worldwide in March or April, though some factories are re-opening. Production losses in Europe alone were estimated to be over 2 million motor vehicles by the end of April. The loss of this production capacity will impact the semiconductor automotive supply chain in the coming months, with sales of global light vehicles expected to be down over 20% this year to around 70 million vehicles assuming the pandemic eases in the first half of 2020.
Smartphones have been a major market and fueled a lot of the growth in the semiconductor market for the last few years. However, according to the analysis by market research company Canalys, worldwide smartphone shipments were estimated to have dropped -13% to around 295 million compared to a year ago. It is the first time they have dropped to less than 300 million in a quarter since 2014, with all the top 3 smartphone manufacturers, Samsung, Huawei and Apple showing sharp declines.
Whilst consumer demand for laptops increased in Q1 due to the increase in home working, wordwide PC shipments were actually down around 10% in Q1 compared to a year ago due to delays in production and logistics. The spike in demand in Q1 is not expected to continue for the rest of the year, with Q2 demand expected to be significantly down.
The COVID-19 outbreak has seen market analysts to significantly decrease their forecasts for semiconductor sales in 2020, with almost everybody predicting a contraction in the industry for the second year running of between 1 to 4%. IC insights recently predicted that for the first time there will be a back-to-back decline in annual IC volume shipments in 2020, with a fall of 4% expected in 2020 following a 6% decline in unit shipments last year in 2019.
Whilst the outlook may not be positive, many of the major semiconductor companies did manage to have a good quarter in Q1, with many companies showing growth as the supply chain is slow to react. Also, there is a feeling that many companies are still ordering to ensure their inventories are full to de-risk supply chain issues and to allow them to react quickly to a restart of the market. Of the top 10 semiconductor companies worldwide, the memory manufacturers, foundries and OSATs generally reported improved revenue compared to a year ago but are forecasting the coming quarters to be down, whilst amongst the broader semiconductor companies the first quarter was mixed but all are forecasting next quarter to be down or giving no guidance due to the uncertainty caused by COVID-19.
Samsung reported revenue of US$46 billion, a -7.6% revenue decline from the previous quarter but was up 5.6% compared to a year ago as memory sales improved on solid server and PC demand. They forecasted a further decline in Q2 due to COVID-19, and uncertainty in 2nd half. Intel reported a 23% yoy growth in revenue in Q1 at US$19.83 million, and are predicting around a 9% decline in Q2, and declined to give a guidance for the full year due to COVID-19 uncertainties. Leading foundry TSMC reported Q1 revenue of US$10.3 billion, a 42% yoy revenue growth but down -2% on last quarter, with revenue from smartphones dropping 9%. TSMC is forecasting revenue will be flat in Q2. Memory manufacturer SK Hynix, was up 239% from last quarter but was down -41% year on year, as server demand offset weakness from the smartphone market, and they are predicting demand volatility if the outbreak is prolonged.
Amongst the broader semiconductor market companies, Broadcom reported early in March and reported revenue of US$4.2 billion from its semiconductor solutions division, down 4% year on year and down 8% quarter on quarter. Broadcom also withdrew its full-year guidance due to uncertainty over COVID-19 outbreak and reported disruptions to its supply chain. Qualcomm reported fiscal Q2 revenue of US$5.21 billion, 6.6% up on a year ago, and expects a midpoint revenue of US$4.8 billion in FQ3. Qualcomm said it expected smartphone shipments to be down 30% compared to its previous forecast but they still kept its full-year forecast of around 200million 5G deliveries for the full year. Texas Instruments revenue was down -7% yoy at US$3.33 billion and citing uncertainty caused by COVID-19, forecasted next quarter revenue down at US$2.9 billion.
Equipment makers ASML and LAM Research both reported good orders but reduced revenue due to supply and production problems caused by COVID-19.
Other Company News
Air Liquide has announced it will invest about US$215 million to build new production capacities in Taiwan in Hsinchu and Tainan with production in the second quarter of 2021.
Samsung is determined to complete expansion of its 2nd chip factory in Xian, China despite the COVID-19 outbreak and sent 200 South Korean engineers and workers in April to China via chartered plane.
Taiwan’s Foxconn has signed an agreement in April with Qingdao government in China to build a test and assembly plant. Production will start next year and be at full capacity by 2025.
MagnaChip announced in March it would be selling off its foundry services and manufacturing facility for $435 million to a financial consortium including SK Hynix.
Infineon completed its acquisition of Cypress Semiconductor in mid-April after receiving approval for the US government.
STMicroelectronics has announced it will acquire a majority stake in French Gallium Nitride device designer and manufacturer Exagan.
In March U.S. printer maker Xerox announced has dropped its $35 billion hostile cash-and-stock bid for HP after COVID-19 impacted it’s take over campaign.
NXP has announced that Kurt Sievers will replace Rick Clemmer as president and CEO in Q2. Rick Clemmer has been CEO since 2009 will remain as strategic advisor to the company.
Whilst there is light at the end of the tunnel as countries start to open up their economies, the short-term outlook for the semiconductor segment is not very positive with most companies expecting next quarter to be worse due to the impact of COVID-19. How long it will take for the economy to get back to normal is still unclear. As well as lifting internal restrictions, countries will need to open borders so that people that have been furloughed and made redundant can return to work for the global economy to get fully back to normal. This will probably take quite some time as governments walk the tightrope between economic recovery and re-occurrence of the outbreak unless a vaccine is found quickly. In the short term, companies will be carefully looking at their bottom line.
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Head of Global Subcon Manufacturing