The thesis I’m going to explain here is very simple. Basically, the coronavirus event should induce a negative semiconductor cycle. This is so for a very basic reason: typically, negative semiconductor cycles are induced by excess semiconductor inventory.
Now let’s see what the coronavirus event has done, for which we have definite proof:
- The coronavirus event led to a collapse of Chinese demand for electronic devices, for instance smartphones. Also importantly, the coronavirus event led to a collapse of the fabrication of electronic devices. We know both of these things because of Apple’s (AAPL) warning Monday. What happened at Apple will also have happened at many other electronics brands.
Now, there’s an important characteristic of the semiconductor market which we should also take into account. That’s where advanced semiconductors are fabricated, and where they’re put into products:
- They’re put into products in China.
- But by and large, advanced semiconductors (think DRAM, CPUs, advanced microcontrollers, etc.) are made outside China. Advanced-process semiconductors are fabricated by a few well-known companies. Companies like TSMC (TSM), Intel (INTC), Micron (MU), Samsung (OTC:SSNLF), GlobalFoundries, etc.
We know that these large, advanced companies overwhelmingly have their production facilities outside of China. So what’s happening during the coronavirus event? Two things are happening:
- The production and demand for products using these advanced semiconductors are being affected.
- But the production of the advanced semiconductors, which go into these products, is not being affected because it’s made outside of the area seeing the production stops.
Hence, inventory (for advanced semiconductors) is inevitably being built.
Now, one could say that when the coronavirus event ends, this inventory would be consumed. But that would be somewhat wrong – because then production should accelerate to pre-crisis levels, and the inventory bulge will remain unless the production of advanced semiconductors is, itself, slowed down (which is what constitutes a negative semiconductor cycle).
Thus, taking into account this simple logic, it’s likely that the current coronavirus event will lead to a negative (advanced) semiconductor cycle. I always talk about “advanced” here, because these are the semiconductor companies we see listed in Western stock exchanges, of course.
One of the first places where this cycle should make its appearance is in DRAM markets. DRAMs are produced with advanced processes. And indeed, we already have the first incipient signs that the previously positive DRAM cycle might have been broken:
It is to be expected that this effect could take place in many other associated semiconductor markets.
The coronavirus event should lead to a negative semiconductor cycle through the buildup of inventory.
This buildup of inventory should happen because products incorporating advanced semiconductors are mostly built in China, and thus saw a production slowdown, whereas advanced semiconductors are built outside of China, and thus did not see that production slowdown.
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