FRANK---Impact Of Asia-Pacific Crisis On The Semiconductor Industry
08:59am EST 12-Nov-97
Texas Instruments continues to be positive about the prospects for the Asia-Pacific region and believes that many of the concerns being expressed are either misplaced or overamplified. In general, the current financial turmoil in the region is not based on economic fundamental weakness, with possibly Thailand the exception. In other areas (e.g., Malaysia, Singapore, Hong Kong, Taiwan, etc.), the economic fundamentals remain solid. Therefore, the stage is already set for recoveries in these countries.
In the short run, economic growth in Asia is likely to be affected by the region's declining stock markets and the related impact on consumer confidence and spending. However, continued strong growth in China, which now represents about 60% of the GDP of the region, should allow the Asia-Pacific region to grow at a rate close to 8% in 1998, up from 7% to 8% growth in 1997. This is still two to three times faster than virtually any other area of the world.
Through perhaps the first half of 1998, the economic growth of the region may slow somewhat, but beyond that time, growth may begin to accelerate for the following reasons:
1) The currency depreciations that have occurred could accelerate exports and result in stronger economic growth for the associated countries in the second half of 1998.
2) China continues to experience strong economic growth and its currency remains stable. China is a large island in a sea of turmoil that can provide a stabilizing force to the region.
3) Those forces that contributed to the rapid economic growth in Asia in the past continue today (e.g., high savings rate, open trading policies, emphasis on education, etc.). Therefore, the Asia-Pacific area should remain one of the higher growth regions of the world during the next few years. With the possible exception of the United States, no other market appears to be as strong.
The impact of the Asian economic crisis on the U.S. market should be negligible. One reason is that U.S. exports to Asia-Pacific represent only about 15% of its total exports. Secondly, exports have never been a major source of growth for the United States. Therefore, U.S. GDP growth could remain unchanged as a result of the Asia-Pacific conditions.
The one country most affected by the Asia-Pacific situation is Japan. The economic condition of Japan is already weak and may weaken further as a result of the currency depreciation that has occurred in the Asia-Pacific region. Japan was already noncompetitive relative to Korea and Taiwan, and now will be even less so. This is significant since approximately 30% of Japan's exports go to the Asia-Pacific region.
When assessing the impact of the current economic situation in the Asia-Pacific region on the semiconductor industry, the possibility of weakening end equipment sales to that region due to slowing economic conditions and weaker currencies must be considered. However, any slowdown in end equipment sales, should it occur, could be short-lived and relatively minor for the following reasons:
1) Weakness in Southeast Asia could be offset by continued strength in China. Moreover, Europe could be stronger in 1998 than in 1997, which could offset additional pressures in Japan or other Asia-Pacific countries.
2) It is estimated that only about 12% of worldwide personal computers are consumed in the Asia-Pacific region. Excluding China, less than 10% of worldwide PC sales are consumed in Asia-Pacific, while about 25% of the worldwide PC supply is produced in this region. Roughly the same situation exists in the communications market, as it is estimated that only between 10% and 15% of world communications equipment is consumed in this area and less than that if China is excluded.
3) Stock market crashes are not new to the region. For example in 1994-95, there was a 22% decline in the Hong Kong stock market, which had little effect on PC growth at that time. Consequently, it is possible that both PCs and cell phones could grow during a recession in the region since demand for these products is strong.
If it is conservatively assumed that semiconductor industry growth in Asia-Pacific and Japan will be five percentage points lower than it would have been without the currency crisis, the negative impact on world semiconductor growth because of pressures in the region would only be about two percentage points. Therefore, the Semiconductor Industry Association's (SIA) 1998 worldwide forecast of 17% would only drop to 15%. Texas Instruments continues to forecast that the worldwide semiconductor industry can grow at or above its historical trendline, which has averaged about 15%.
One area of the semiconductor industry that could be affected by the Asia-Pacific economic situation is capital spending on semiconductor capacity in Korea and Taiwan. It already appears that some postponement of projects is beginning to occur in Korea. This could help restore supply/demand balance to the DRAM market sooner than otherwise would have occurred.
The Asia-Pacific region is expected to become the second-largest semiconductor market in the world, following the U.S., by 2000. The current currency and stock market problems should have little impact on the longer-term growth of the region.
Specifically regarding Texas Instruments, the negative impact of the Southeast Asia economic situation will likely be small and, in fact, could be positive for the following reasons:
1) The currency depreciation in the region will have little impact on Texas Instruments, revenues since the region is essentially a dollar currency area and semiconductor device sales are priced in dollars. On the cost side, however, the stronger dollar will lower expenses in local currencies.
2) Texas Instruments, revenues from the Asia-Pacific region represent less than 15% of its total revenues. More precisely, in 1996, these revenues represented 13% of total company revenues. In addition, less than half of those revenues are consumed in Asia. The rest are re-exported by the multinational corporations that operate in the region.
3) If Korea and Taiwan delay capital spending, then DRAM prices could be positively affected.
In summary, Texas Instruments continues to be positive on the Asia-Pacific region and if there is a short-run negative impact, it should be short-lived and relatively minor. In addition, the specific effect on Texas Instruments should be small and, in fact, may turn out to be positive because local currency costs will decline relative to the dollar.
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