What Will it Take for the Semiconductor Industry to Recover from COVID-19?March 30, 2020 by Luke James
The human tragedy that is COVID-19 has a growing impact on the global economy, and just as the semiconductor industry was on the cusp of springing back from a period of downturn, COVID-19 is threatening its recovery.
Some segments of the semiconductor industry are faring better than others, such as those involved in cloud computing and data centers. Other segments however, such as consumer electronics and automotive, will be bearing the brunt of the pandemic’s impact and any consequential economic downturn.
This is according to analysts who last week identified which chip stocks they believe are the best and worst positioned in the current climate.
"We are concerned that global chip shipments might be impacted not just by the supply-chain disruption caused by the Covid-19 lockdowns but also by the associated economic fallout on demand," Nomura Instinet analyst David Wong said in a note to clients Wednesday, March 25.
A table detailing the rate of concern of electronics manufacturers. Image credited to ECIA
COVID-19’s Impact on Chip Sales
Last month, research firm IDC warned that COVID-19 will have a significant impact on the global semiconductor industry. Among its grim estimations was a near-80% chance that semiconductor revenues would see a significant contraction. In contrast, the firm’s estimate prior to COVID-19 was that the industry would see minor growth of around 2%. Now, the most likely outcome is a year-over-year drop in sales of 6% in 2020, IDC said.
"The emergence of Covid-19 has brought with it travel bans and quarantines, massive slowing of the supply chain, uncertainty in the stock market, falling business confidence, and growing panic among the population," analyst Mario Morales said in a news release.
S&P Global has also estimated COVID-19’s impact on the global economy. “The speed and spread in the last two months pose a risk to the global economy and credit,” said a spokesperson for S&P, which estimates that the slowdown in smartphone sales and a pause in related economic activity will have an impact of 0.3% of global gross domestic product (GDP) in 2020.
Is the Worst Yet to Come?
IPC, the global trade association serving the printed circuit board and electronics assembly industries, ran its own survey in early February and reported that of its 150 participants, 65% reported delays from suppliers due to the spread of COVID-19. Now almost two months later, is the worst yet to come as countries worldwide struggle to contain and manage the virus?
Although the apparent slowdown and recovery in China may lead to hope among some spectators, there is still a long way to go.
Of the manufacturers that IPC surveyed, many operate across different industries and domains. They rely on acquiring components from different suppliers who receive these orders and ship out their components to the manufacturers. These components are then assembled, and the finished product is then shipped on to the ultimate client, usually a consumer brand like Apple.
A table displaying the average percentage results of a survey regarding the impact of COVID-19 on electronics manufacturers supplying customers. Image credited to ECIA
As there are many different companies involved in the design, development, and manufacture of a consumer product like a smartphone, it is crucial that all the necessary elements are received at the same time, so that production can take place and companies can avoid stockpiling inventory.
COVID-19 is causing problems for this delicate process, though, with many of those surveyed by IPC reporting delays of three weeks or more. And when it comes to pondering the potential impact that COVID-19 will have on their business, 30% of respondents admitted extreme concern while 54% said they were somewhat concerned.
With COVID-19 set to peak in many prominent electronics hubs including much of Europe and the United States, with an anonymous source telling IPC that they believe "…the worst is yet to come,” and added, "The Chinese local government is fully overwhelmed with this process and could take weeks to get flushed out for factory production starting."
And it is not solely reduced capacity that is the cause of manufacturers’ fears. IPC’s chief economist Shawn DuBravac said that a transportation bottleneck is another major concern. Piles of late shipments could clog up logistics and cause even further delays, even when factories are back up and running. "We're worried that — even after manufacturing returns in China for these components that we use — there'll be further delays because transportation capacity will be maxed out," DuBravac said.
The Industry Will Play a Vital Role in Eventual Recovery
It’s not all doom and gloom, though. The semiconductor industry’s saving grace may well be that it is expected to play a key role in the eventual economic recovery once COVID-19 is all over. Emerging technologies such as the Internet of Things, 5G, artificial intelligence edge computing, and more will more than likely be fundamental to an overall global recovery by the technology sector.
And just how much the semiconductor industry will suffer at the hands of COVID-19 is a question that is still up in the air. Many companies’ inventories can weather the storm for now but if delays are to go on for an unprecedented amount of time, say 12 weeks, the situation could turn very sour.
As governments continue to struggle with COVID-19 and manufacturers struggle to manage the pandemic’s growing impact on their supply chains, all we can do is wait and see what happens—there is no alternative choice.