Semiconductor Sales Set For Biggest Decline In A Decade

'It could be factory adjustment coming out of a high-demand environment where there were shortages, and now they need to adjust their forecasting and production,' a distributor executive says of the semiconductor industry's projected revenue decline for 2019.

The semiconductor industry this year is set for the largest downturn in sales since the Great Recession, according to new industry research.

Research firm IHS Markit said it has slashed its outlook for 2019 semiconductor sales by more than 10 percentage points, projecting revenue to decline 7.4 percent to $446.2 billion. That's a major reversal from the 2.9 percent growth the firm previously projected for 2019 revenue in December.

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If IHS Markit's projection holds true, the firm said it would represent the semiconductor industry's biggest annual percentage decrease since 2009, when chip sales dipped by nearly 11 percent.

“After the chip industry attained a heady revenue expansion of 15 percent in 2018, many semiconductor suppliers in early 2019 remained optimistic that they could achieve modest growth this year," Myson Robles Bruce, an IHS Markit researcher, said in a statement.

"However, the chipmakers’ confidence quickly transformed into apprehension as they witnessed the depth and ferocity of the current downturn," Bruce continued. "The latest data indicates the semiconductor business now is destined for its worst year in a decade."

Oversupply, Low Prices Contribute To Downturn

IHS Markit attributed the downturn to "increasingly soft demand, combined with a rapid rise in inventory levels in the first quarter," largely impacting DRAM and NAND flash memory, general-purpose processors, microcontroller units and ASICs (application-specific integrated circuits).

These trends are reflected in the most recent earnings results from the world's largest semiconductor companies, namely Intel and Samsung. Santa Clara, Calif.-based Intel reported last week that it now expects 2019 revenue to decline 3 percent to $69 billion from the previous year, attributing the anticipated decline to continued deterioration of memory pricing, as well as lower demand from cloud service providers and enterprises.

Samsung Tuesday said that weak memory chip demand hurt the Seoul, South Korea-based company's operating profit, which dropped a staggering 60 percent in the first quarter to 6.2 trillion won ($5.4 billion). The company's Q1 revenue declined 13 percent year-over-year to 52.4 trillion won ($45 billion).

The Channel Sounds Off On The Report

Dominic Daninger, vice president of engineering at Nor-Tech, a Burnsville, Minn.-based system builder, said while he hasn't seen the impact with his company's high-performance computing business, the company has noticed trends such as rapidly decreasing memory prices due to oversupply.

"The price erosion has been incredible," he said of NAND flash products. "Manufacturing was cranking out more or the market is shrinking to some degree or both. DRAM is seeing the same thing. A lot of manufacturing capability and some decrease in demand."

Daninger agreed with another point made in the IHS Markit report — that lower demand for smartphones is hurting the semiconductor industry as well. IDC reported on Tuesday that smartphone shipments declined 6.6 percent in the first quarter, marking the sixth consecutive quarterly decline in the market.

"There just isn't a must-have feature that's popping up every year or two," he said.

Memory Decline Comes After High Prices And Shortages

Kent Tibbils, vice president of marketing at ASI, a Fremont, Calif.-based distributor, said he doesn't think the industry will see a downturn as dramatic as the one seen during the last recession. But he said a build-up of inventory has led to a slow start in the year.

"We do typically see the first couple months of the year being a little slower because there was a lot of build-up of inventory," he said.

Tibbils said the decline does have some silver linings for IT buyers.

"We've seen DRAM pricing coming down for some time," he said. "I don’t think anybody in the industry is upset about that given how it was a year ago."

The decline in memory prices follows a period in which memory shortages pushed DRAM and NAND flash prices up, which benefited vendors like Samsung. Now the industry is dealing with the fact that supply has caught up with demand and surpassed it.

"It could be factory adjustment coming out of a high-demand environment where there were shortages, and now they need to adjust their forecasting and production," he said.

Recovery Expected In Second Half Of 2019

While the IHS Markit report casts a shadow on the semiconductor industry, the firm expects a recovery to begin in the third quarter, echoing recent statements from Intel.

IHS Markit said the recovery will be led by NAND flash memory parts used in solid-state drives and high-end smartphones, as well as processors in laptops and servers.

Both Intel and its rival AMD plan to release new processors in the second half of the year that could help fuel this recovery. For Intel, it will be the company's 10-nanometer Ice Lake mobile platform for next-generation laptops. AMD, on the other hand, plans to release new 7-nanometer processors for desktop computers and servers, as well as a new line of 7nm graphics cards.

Tibbils said he expects IT buying to ramp up, especially for client computers, in the second half of the year as Microsoft's support for Windows 7 comes to an end.

"That would be good for client stuff, memory, SSDs and processors," he said.