A new tech cy­cle?

Financial Mirror (Cyprus) - - FRONT PAGE - By Neil New­man

Weak Ja­panese ex­ports for Oc­to­ber were not a big sur­prise given that the yen has been strong and global trade re­mains lack­lus­ter. Yet buried within re­cent (dreary) trade re­leases is ev­i­dence point­ing to a new semi­con­duc­tor in­vest­ment cy­cle. The first sig­nal, from of­fi­cial data at least, came in Ja­pan’s 3Q16 GDP re­port which showed growth at 0.5%, ver­sus an ex­pected 0.2%, with the dif­fer­ence ex­plained by ex­ports of elec­tronic com­po­nents and semi­con­duc­tor pro­duc­tion equip­ment.

Then, last Fri­day, Ja­pan’s semi­con­duc­tor trade association said that orders were at a post-2007 high, with espe­cially strong de­mand com­ing from China.

In­creased chip de­mand partly stems from the roll-out of vir­tual re­al­ity gad­gets for the hol­i­day sea­son. These de­vices must han­dle in­tense three-di­men­sional graph­ics, which has upped the de­mand for ul­tra­fast mem­ory and caused DRAM prices to soar since the sum­mer. Sim­i­lar tech­nol­ogy is also be­ing bun­dled into gam­ing con­soles and higher end per­sonal com­put­ers; for ex­am­ple, Sony’s PlayS­ta­tion VR has only been on sale in Ja­pan for a few weeks, but sales have out­stripped the PlayS­ta­tion 4 by 70%. Car­phone Ware­house, a UK elec­tron­ics and tele­phony re­tailer, pre­dicts a dou­bling of VR equip­ment own­er­ship in the UK over the fes­tive sea­son to one in ten house­holds.

In ad­di­tion to a new class of en­ter­tain­ment and gam­ing de­vices be­ing re­leased, a con­strained sup­ply-side is be­ing forced to re­spond to ap­pre­cia­ble de­mand shifts in three other key mar­ket seg­ments:

1) Au­to­mo­tive elec­tron­ics is the fastest grow­ing seg­ment in the chip mar­ket at about 6.7% The av­er­age new car al­ready has 50-60 pro­ces­sors and up to 600 mi­crochips and that will only rise as ve­hi­cles ac­quire full au­tonomous driv­ing ca­pa­bil­ity. This should en­sure that that the mar­ket for au­to­mo­tive chips rises from about $29 bln last year to about $44 bln by 2022, ac­cord­ing to IHS Markit, a re­search firm.

2) The af­ter­math of Sam­sung’s Galaxy Note 7 ex­plod­ing bat­tery de­ba­cle has been to fo­cus hand­set mak­ers on the qual­ity of com­po­nen­try go­ing into de­vices and man­u­fac­tur­ing ca­pa­bil­i­ties in low cost pro­duc­tion lo­ca­tions. A num­ber of Ja­panese equip­ment pro­duc­ers we have spo­ken to have cited this in­ci­dent as a cat­a­lyst for hand­set ven­dors shift­ing to higher qual­ity com­po­nents, which in turn is forc­ing their sup­pli­ers to up­grade their pro­duc­tion equip­ment.

3) Mem­ory used in high-end servers is in short sup­ply as the likes of Google, Face­book, Ama­zon, NTT and Alibaba con­tinue to build out their cloud com­put­ing sys­tems.

The big pic­ture is that de­mand for IT com­po­nen­try is ris­ing at a time when the sup­ply side is con­strained. The mem­ory sec­tor is highly con­cen­trated, with Sam­sung and SK Hynix con­trol­ling about 75% of the global DRAM mar­ket, while Sam­sung, Toshiba, West­ern Dig­i­tal and Mi­cron have about 85% of the NAND flash mem­ory used in smart­phones.

The source of fresh sup­ply is likely to be China where the govern­ment has set a tar­get of se­cur­ing a one-third share of the global $300 bln chip mar­ket. To that end, the govern­ment is of­fer­ing pro­duc­ers low cost loans and tax-free in­cen­tives over the next ten years that amount to RMB1.2trln ($175 bln).

As part of this ex­pan­sion Chi­nese firms are mak­ing over­seas ac­qui­si­tions, and to a greater ex­tent are tool­ing up fac­to­ries at home—China’s big­gest chip maker, Semi­con­duc­tor Man­u­fac­tur­ing In­ter­na­tional is presently build­ing a 12” wafer fab­ri­ca­tion plant in Shen­zhen and will see its cap­i­tal ex­pen­di­ture in 2016 rise 68% to $2.7 bln.

It will, how­ever, take a fair time for such new ca­pac­ity to come on­line so given the con­cen­trated na­ture of the chip mar­ket and the ap­par­ent step change in de­mand, semi­con­duc­tor firms look set to en­joy sig­nif­i­cant pric­ing power for a de­cent while to come. This looks like a good time to be such a pro­ducer or a maker of picks and shov­els serv­ing that busi­ness.

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