Semiconductor Outlook from IBD:
Asia's economic crisis could inflict some casualties among chipmakers.
How chipmakers will fare depends on key markets. Sales of personal computers, cellular phones and consumer electronics in Asia will be closely watched, analysts say.
Many Asian economies, especially Korea's, are faltering in the face of devalued currencies. As a result, Asian manufacturers are producing less-expensive products, everything from memory chips to electronics gear.
To fight their way out of the slump, Asian companies will try to increase exports.
''I think the crisis will have three major consequences: slowdown of the internal demand in Asia, the exchange rate valuation of (products) and lower capital spending,'' said Jean Philippe Dauvin, chief economist at SGS-Thomson Microelectronics NV of France.
Dauvin tracks economic trends in regions such as Asia. He helps develop strategies for SGS based on those findings. SGS could feel the effects of the crisis because it makes chips for consumer electronics and cellular phones.
SGS is just one of many companies bracing for possible fallout from Asia's troubles. Others include Intel Corp. of Santa Clara, Calif., Motorola Inc. of Schaumburg, Ill., and Philips Electronics NV of the Netherlands.
Many U.S. chipmakers have discounted the growing turmoil in Asia currency markets. Their reasoning: In most cases, Asia accounts for less than 15% of sales.
Still, some analysts are cautious. And signs are turning up that there may be trouble on the horizon.
Though chipmakers depend on Asia for only 10% or 15% of sales, ''a disproportionate amount of their growth has come from Asia,'' said Drew Peck, analyst at Cowen & Co. in Boston.
Dataquest Inc. of San Jose, Calif., has cut its forecast for Asia-Pacific chip sales in '97. It had expected 15% growth to about $34 billion. It now predicts sales of $32 billion, up 8.3%.
Effects of the crisis already are reaching beyond chipmakers.
''The financial crisis in the region has been a bummer for multinational (PC makers) because local and regional (rivals) have been able to offer more competitive prices,'' said Cherry Velarde, an analyst with Dataquest in Hong Kong. ''We've already seen Asian (companies) move ahead.''
PC sales in Indonesia, Thailand, Malaysia and Korea have slowed significantly, Dataquest says. International Data Corp. of Framingham, Mass., concurs. It recently lowered its '98 Asian demand forecast to 12.3 million from 12.9 million.
One mitigating factor could be China. That country will buy $17 billion in chips in 2000, up from $8.3 billion in '97, says the Semiconductor Industry Association of San Jose, Calif. Dataquest says China's PC market is expected to grow 60% in the second half of '97.
''As long as China stays strong, you don't need to worry too much,'' said Vladi Catto, chief economist at Dallas-based Texas Instruments Inc.
Texas Instruments, a maker of memory chips, is among the companies waiting to see how the crisis will affect them.
One thing TI is watching is South Korea's ability to handle the crisis. Korea's currency, the won, has been in a free fall. The International Monetary Fund is expected to aid Korea with a bailout plan.
With government support, Korean firms emerged in the '90s as the leading suppliers of memory chips. That was until sales for memory chips plunged in '96 and stayed low this year.
Micron Technology Inc., one of the last U.S. makers of memory chips along with TI, is on guard. The Boise, Idaho-based chipmaker doesn't want IMF funds to aid Korea's memory chip makers.
So Micron has lobbied U.S. legislators to track the IMF's talks with Korea.
''We feel optimistic that there will be no (government) subsidies or loans as there have been in the past,'' a Micron spokesperson said.
In the short term, the devalued won will enable Korean chipmakers Samsung Group, L.G. Electronics Inc. and Hyundai Co. to increase exports, says TI's Catto.
''They will try to produce and sell as many memory chips as they can,'' he said. ''There will be downward pressure on memory chip pricing.''
Memory chip prices, in fact, hit new lows this month, analysts say.
Catto is optimistic about the long-term outlook for the memory chip market. If Korea's chipmakers scale back capital spending, he expects the oversupply of memory chips to ease.
At SGS, Dauvin also sees a silver lining. He says the chip industry could switch from overcapacity to undercapacity by '99 or 2000, thereby boosting chip prices.
But U.S. equipment makers also face slowing sales in Asia, where their customers will have less money to spend.
Their sales would slow if Korea's chipmakers build fewer factories. Korea's chipmakers may be forced to cut back investment in next-generation manufacturing gear as well.
Taiwan's chipmakers could come to the rescue of equipment suppliers. Taiwan's firms may try to grab market share in memory chips at Korea's expense, some analysts say.
If that happens, Taiwan's chipmakers will keep investing in new factories and prop up equipment sales.
Another possible side effect of the crisis is that Asian PC makers and consumer electronics companies will be eager to boost exports, analysts say.
''Asia-Pacific and Japan are going to have to export to recover,'' said Morry Marshall, analyst at market research firm In-Stat Inc. in Scottsdale, Ariz. ''And less-expensive goods coming into this country potentially becomes a political problem.''
At SGS, Dauvin agrees. ''The question is how much export improvement will compensate for a slowdown in local demand,'' he said. ''I don't know.''
Dauvin believes that the Asian crisis will impact Japan more than the U.S. He says Japan and other Asian nations are closely tied.
He says Japanese exports to other Asian countries will fall. He also expects Japanese chip production to drop by about 2%.
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Copyright (c) 1997 Investors Business Daily, All rights reserved.
Investor's Business Daily - Computers & Technology (12/17/97)
Will Chipmakers Survive Asia's Economic Slump?
By Reinhardt Krause
Transmitted: 01/18/98 21:11 (p3aesc1e) |
