Tech sector turns wary as 'chip dip' hurts sales

Notion of dip leading to general downturn evokes memories of dot.com bust of 2000

SAN FRANCISCO • Don't look now: Storm clouds are gathering over technology.

Chinese consumers have pulled back their spending, blowing a US$9 billion (S$12 billion) hole in Apple's recent quarterly revenue.

China was again a culprit when Nvidia warned last month that its revenue would come in 20 per cent below expectations, though the graphics chipmaker also blamed slack demand from bitcoin miners and cloud data centres.

Chipmaker Intel cited intensifying "trade and macro concerns" for financial results last month that did not meet expectations.

And Samsung, another semiconductor powerhouse, said sales plunged 10 per cent in the fourth quarter because of weakening demand for its memory chips from data centres and smartphones.

China, smartphones, bitcoin and cloud computing have been among the major drivers of the long tech boom, which in turn has powered the global economy for the last decade.

The ingredient common to all of these sectors is computer chips, which form the brains of devices and whose ubiquity means they provide early signals about changes in supply and demand.

Long-time tech industry watchers began picking up trouble signs late last spring in the market for memory chips, an essential component in computers that in decades past prompted trade tensions between the United States and rivals in Japan and South Korea. Makers of a key category called dynamic random access memory, or DRAM, have suffered product shortages and gluts that whipsawed pricing and heralded changing fortunes for the broader industry.

Warnings about a sales slowdown this year have come in recent weeks from the big chip suppliers, which also include Taiwan Semiconductor Manufacturing Company, Micron Technology and Western Digital. It is an abrupt reversal, coming on the heels of stellar results last year for the business that gave Silicon Valley its name.

Last year, manufacturers shipped a staggering one trillion chips and other semiconductor devices, 10 per cent more than the year before, IC Insights estimates. But this year is shaping up to be a much different story, now that several important sources of chip demand appear to be dampening.

The notion that a chip dip could lead to a general downturn evokes memories of 2000, when one day tech had an unlimited future and the next, it was crashing in what became known as the dot.com bust.

Back then, investors showed no mercy. Intel made what seemed a modest adjustment to its revenue forecast for the third quarter of 2000, saying it would be up 3 per cent to 5 per cent instead of 7 per cent to 9 per cent. The value of the company immediately fell by nearly 30 per cent over the next few days.

This year, with a similar downgrade, investors largely shrugged it off. Intel shed about 5 per cent of its value over a week.

While acknowledging the parallels to 2000, Mr Gene Munster, research director of venture capital firm Loup Ventures, said he thinks it is different this time. Back then, among the best customers for the established chip firms were start-ups, which had more dreams than revenue. As the start-ups faltered, the chip firms were imperilled. The storm lasted for years.

"These are all real companies now, with real customers," Mr Munster said. "People are willing to look past a few bumpy months."

Even if the problems do not linger, they are a reminder that demand is not eternal. That seems to be what happened with smartphones, which use multiple varieties of chips to run software, process data and connect to cellular networks.

Consider Apple, which gave a muted forecast last October for the holiday season and followed up early last month with its first full-fledged revenue warning in 16 years. The iPhone maker faces stiff competition and slumping demand in China. Total smartphone shipments fell 15 per cent in that country in the fourth quarter, according to research firm Canalys.

Mr Michael Wolf, who surveys consumers annually about their use of technology and media for his management consulting firm Activate, said people seem to be shifting to lower-priced phone models and cheaper service plans. But he said demand seems strong for digital subscription services like Netflix, video games, online advertising and business-to-business sales for companies like Microsoft.

"From all of our research, I don't see some general consumer malaise," he said.

Yet several other businesses appear to be softening as well, including the market for server systems used by cloud service operators, including Amazon, Microsoft and Google. Sales of high-priced chips for such hardware have driven profits for companies like Intel and Nvidia, but they now say equipment buyers for data centres have turned cautious.

"Cloud service providers shifted from building capacity to absorbing capacity," Mr Robert Swan, who was then Intel's chief financial officer and acting chief executive, said on a conference call after Intel released its fourth-quarter results.

Long-time tech industry watchers began picking up trouble signs late last spring in the market for memory chips, an essential component in computers that in decades past prompted trade tensions between the United States and rivals in Japan and South Korea.

Makers of a key category called dynamic random access memory, or DRAM, have suffered product shortages and gluts that whipsawed pricing and heralded changing fortunes for the broader industry. During the dot.com bust in 2001, DRAM revenue plummeted 63 per cent while total semiconductor revenue fell 31 per cent, according to Gartner data.

But conditions changed dramatically over the years as manufacturers fled from the lack of profits, leaving three major DRAM makers - Samsung, Hynix and Micron. They have been slow to boost production, enabling them to keep their prices high. And they also benefited as memory became more important in smartphones, data centre hardware and other products beyond the personal computers that once drove most sales.

"The markets today are structurally different," Micron chief executive Sanjay Mehrotra said in a recent interview.

Yet market cycles have not disappeared entirely. DRAM prices peaked last June and began sliding, prompting Micron and Samsung to issue their recent profit warnings. DRAMeXchange, a Taiwan-based firm that tracks the market, predicts DRAM prices will fall an additional 20 per cent in the first quarter.

Memory chips "behave like onions or steel or any other commodity", said Objective Analysis market researcher Jim Handy. "If there is an oversupply, prices fall."

For all the turmoil, industry executives and analysts said business conditions remain a lot healthier than during past semiconductor slumps. For one thing, a series of mergers has reduced price competition.

Companies like Micron, which routinely lost money in past cycles, are expected to remain solidly profitable even if sales dip.

Beyond that, there is the glorious future.

"Eventually, the storm will pass and these companies - Nvidia, Apple, Samsung - will have pole position in the next tech growth curve, including AI (artificial intelligence), healthcare, self-driving cars and 5G," said Mr Munster of Loup Ventures. "The curve is so exciting, so juicy, so full of opportunity."

NYTIMES

A version of this article appeared in the print edition of The Straits Times on February 07, 2019, with the headline 'Tech sector turns wary as 'chip dip' hurts sales'. Print Edition | Subscribe