Chipmakers on the Verge?

Overcapacity, bankruptcies threatened and government bailouts. No, that’s not the banking sector it is the global semiconductor industry. These companies have invested large sums of money into new facilities to as demand for new electronic devices grew along with consumer demand. Of course they are just as susceptible to economic changes as any other industry and demand has fallen along with the economy. Throw in the global slowdown and some the production demands look like the decline in auto sales. Spending is estimated to decline nearly 50% from the peak in 2007 through the end of 2009. This decline in demand has most companies running deep in the red with expenses of the new facilities to accommodate expected demand pressuring the bottom line.

It has impacted some of the largest producers of semiconductor chips in Asia to get government money to stay afloat. This could produce a glut in the market place as companies will continue to produce in light of the government support. This could hold prices down long term and not just during the recession. 70% of production cost is fixed for many of these companies which gives no reason to cut back production. Falling demand had mattered little as production remains steady and the inventories continue to rise. This problem has ballooned from $3.8 billion in September to $10.2 billion in December and in turn prices continue to fall impacting everyone. This may be good for consumers and innovation of new products, but for investing in these companies it isn’t a good mix.

Looking at a chart of iShares GS Semiconductor ETF (NYSE: IGW) the sector you can see the attempt to move higher off the November lows. The resistance at the $30 mark has held so far and this news is not likely to help much. The focus of the above issues are in the international markets. The question is whether or not the US companies like Intel will be able to compete. They report a 23% drop in fourth quarter revenue and a 90% decline in net earnings, but that was in line with expectations. As expected they gave no forward guidance. Analyst numbers are vague as well with the uncertainty in the sector. Market sentiment may have more to do with direction than fundamentals short term. The sector is worth keeping on my watch list for now.

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