Companies that make the tiny components in your smartphone face trying times

Global demand is slowing for smartphones

PUBLISHED : Thursday, 19 May, 2016, 4:27pm
UPDATED : Thursday, 19 May, 2016, 5:31pm

Semiconductor companies that produce the tiny components that go into smartphones are set for challenging times because of slowing worldwide handset sales, analysts said.

As a result, firms in the sector are under pressure to merge or risk going under financially.

“The impact of slowing smartphone sales growth on the semiconductor industry will be felt hardest by back-end companies,” international agency Fitch Ratings said. “Revenue and profit in the segment could fall by double-digit percentages in 2016 due to lower capacity utilisation and the largely fixed-cost nature of the business.”

Smartphone shipments worldwide flatlined in the first quarter this year. Shipments were up by a mere 0.18 per cent to 334.9 million handsets. It was the smallest year-on-year growth on record, according to the International Data Corporation (IDC), a firm owned by media, events and research company International Data Group.

“The minimal growth this quarter is primarily attributed to strong smartphone saturation in developed markets, as well as a year-over-year decline from both Apple and Samsung, the two market leaders,” IDC said in a report.

The impact of slowing smartphone sales growth on the semiconductor industry will be felt hardest by back-end companies
Fitch Ratings

Falling sales and slower demand for smartphones means that suppliers producing, assembling and testing microchips and other components have received fewer orders from manufacturers.

Apple said with the release of their second-quarter results in late April that sales of iPhones — their flagship product — declined for the first time.

Apple sold 51.2 million iPhones in the period, down 16.3 per cent year-on-year, figures from the company showed.

The Taiwan Semiconductor Manufacturing Company, a major supplier of chips used in Apple’s iPhone 7 and 6S, said orders could shrink by 30 per cent in 2016 compared with last year, according to the Nikkei Asian Review, citing a source familiar with the matter.

Outsourced assembly and testing companies (OSAT), which take on work from mobile phone producers, face the risk of redundancy because their clients may choose to take their services in-house, Fitch said.

Fitch analysts projected that revenues for OSAT companies will fall as much as 15 per cent this year. They said it is likely that larger companies will acquire smaller ones or small firms will merge in order to survive.

Consolidation among major market players has already begun.

Taiwan-based Advanced Semiconductor Engineering (ASE), the world’s largest semiconductor packaging and testing provider, planned to take a major stake in the third-largest operator Siliconware Precision Industries for US$4 billion (HK$31 billion).

The deal fell through after Taiwan’s Fair Trade Commission said New York-listed ASE’s tender offer in late March had expired and so it suspended a review of the bid.

The acquisition raised fears that the deal would undermine competition in the market.

Fitch said ASE’s credit profile, a key gauge of its financial health and risk of bankruptcy, would weaken if the acquisitions were funded by debt.

ASE was placed under ‘Negative Watch’ by Fitch after it announced its acquisition plans. The agency said its credit ratings were likely to come under pressure.

Smaller companies with less than a 5 per cent market share have also begun to seek mergers, the report said.

The semiconductor industry usually undergoes a boom and bust cycle, when companies record high profits for a time then face problems of oversupply.

The industry slowdown usually lasts for a two-year cycle as excess inventories are eventually cleared and manufacturers see a pickup in sales, analysts said, but the saturation of the mobile market globally, and especially in China, is likely to make it difficult for smaller companies to survive.

“A prolonged industry slowdown exacerbated by slowing smartphone sales growth and the absence of a new mass-appeal device could hit the liquidity of smaller OSAT companies,” Fitch’s report said.