There are obvious signs of Global semiconductor manufacturers performance peaking with net profit drop

The signs of global semiconductor manufacturers peaking are strengthening according to Nihon Keizai Shimbun’s report on February 11. The fourth quarter total net profits in 2018 of 8 leading firms including Samsung in Korea decline by 30% compared with last quarter, according to revenue report released on February 9. In the background of China's growth slowing, the sales of iPhone slow and construction boom of data center is over. Increasing inventory of manufacturers results in finance being squeezed, so equipment investment tends to decrease.  

Besides Samsung, Nihon Keizai Shimbun also counts performance of SK Hynix in Korea, Intel in US, TI, Qualcomm, NXP SEMICONDUCTORS in Netherlands, Infineon Technologies AG in Germany and Renesas Electronics in Japan.

Total net profits of 8 manufacturers hit a rock bottom in 2016, then maintain a growing trend and finally peak in 2018 at $25.4 billion. However, it falls to $18.6 billion in the fourth quarter. Except for Qualcomm and Infineon Technologies AG, other 6 manufacturers are all cuaght in profit sliding or loss.

One of headwind is smart phone sales slowing down which heavily use of semiconductor memory and CPU. TI analog semiconductor for smart phone has a weaker sales, which declines by 20% of net profit from October to December in 2018. “We are in a downturn obviously” said by David Pahl, the vice president of TI who has a cautious view of the future.

Samsung’ net profit of the same period also decline by 36%. There is a faltering sales growth of semiconductor memory, whose operating profits falls to 41% with a 14% drop compared with last quarter. Both Intel and SK Hynix who get into semiconductor memory decline in profits.

On one hand, reaction of data center construction boom, which maintains since 2017, also occurs. For example, Amazon, who gets into cloud services “AWS”, only increases by 10% of equipment investment in 2018, which is slower than 50% in 2017. The trend results in semiconductor demand growing weakly. Intel, for example, 2018 operating revenue in CPU for data centers keeps flat from October to December, which once grew by over 10% from July to September.

The trend leads to inventory of each manufacturers growing. Samsung’s inventory scale is up to 49% compared with revenue in October 12, 2018. Inventory once falls to 38% when semiconductor are popular, but it now at a level which has a 10 point gap. The longer for inventory to be converted to cash, the more working capital will be needed and the worse cash receipts and expenditures will be. Intel’s operational cash flow earned from October to December in 2018 is $6.9 billion, which is 5% lower than last year.  

In the background of semiconductor getting worse and limited financial resources, manufacturers begins to reduce their equipment investment. It is predicted that SK Hynix controls its equipment investment of 2019 less than 40% of 2018. Samsung also puts off strengthening equipment investment in related fields of memory.

The focus is how worse will semiconductor industry continue in the future. According to WSTS, an industry group, 2019 semiconductor market scale grows by 3% at a low growing rate. Although there trends such as “maintaining huge investment of data center”(David Vaile, the CFO of Facebook), there is a quantity of pessimism about “headwind is stronger than 2018”(Robert Swan, the CFO of Intel).