A significant decline in the semiconductor sector is inevitable, says tech expert

Key Points
  • The semiconductor sector is set for a significant decline soon, and it would have happened even if the U.S. and China were not engaged in a trade war, said a semiconductor analyst at CLSA.
  • A combination of slowing demand for memory chips, rising inventory levels and falling prices could see a cyclical downturn in the sector, he said.
  • Other analysts have made similar predictions, with some saying the trade war could further exacerbate the situation by taking up semiconductor earnings.
How trade tensions are impacting semiconductors
How trade tensions are impacting semiconductors

The semiconductor sector is due for a significant decline soon — with or without the brewing trade war between the U.S. and China, a tech analyst from CLSA said.

The ongoing tariff battle between the two economic powerhouses has had some impact on demand but there are already warning signs of an impending slowdown, Sebastian Hou, a semiconductor investment analyst at the brokerage and investment group told CNBC at the CLSA Investors' Forum in Hong Kong.

Those signs include a decline in memory chip prices, a build-up in inventory levels and a slowdown in demand from high-growth areas such as data center servers, automotive and industrial, he said.

"In terms of the trade war impact, certainly there is some impact on the potential on the demand side but even without the trade war, in fact, the sector is going to go through this correction because (of) very high inventory across the supply chain," Hou added.

A correction is normally defined as a decline of 10 percent or more for the price of a financial asset.

Other analysts have made similar predictions in recent weeks. Morgan Stanley analyst Shawn Kim noted, after conversations with semiconductor buyers and sellers, that the environment for the memory market has become increasingly negative.

Michaela Rehle | Reuters

Some experts predicted that trade tariffs could worsen the situation by taking up to 25 percent of semiconductor earnings.

Global semiconductor revenue in 2017 came in at $420.4 billion, registering a 21.6 percent growth from a year ago, according to research firm Gartner. That growth came mostly from the memory chip market where undersupply drove prices higher.

Gartner predicted in January that worldwide semiconductor revenue will return to single-figure growth in 2018 "before a correction in the memory market results in revenue declining slightly in 2019."

Hou's predictions for growth in the market were similar.

"Starting from the fourth quarter this year to fourth quarter next year, ... some quarters, some months, we're likely to see negative year-over-year growth of semiconductor," he said. Hou said he expects close to zero percent growth in the sector for 2019.

Developments in new technologies — such as artificial intelligence, the fifth-generation of mobile networks and the so-called Internet of Things — could ultimately see demand in the semiconductor industry pick up again.

However, Hou urged caution over developments in those technologies.

"A lot of them are still in the infant and early stage, so people have very high expectation(s)," he said. "I think that explains in the overbooking in the supply chain, that's why there's a lot of the inventory." Once the cyclical downturn in the sector ends, the semiconductor industry might even grow at a faster pace due to demand from various new applications, Hou predicted.

But the outlook may not be very positive for many of the existing chip makers that dominate the market, including Samsung Electronics, Intel, SK Hynix and Micron Technology. That's because many of the major technology and internet companies are making their own memory chips to put into products and data centers.

Those companies "want to optimize their performance to differentiate themselves, so they have incentive to do that," Hou said, adding it's a paradigm shift in the sector, where incumbents would see their market share shrink over the next five to 10 years.