-Semi Equip go from bad to worse as TSMC cuts capex
-Numbers will be slashed for December quarter
-So far just a handful of exceptions to blockade but temporary
-China’s response could be very ugly
Fast motion train wreck
Just when some people thought that Fridays department of commerce announcement couldn’t get worse, TSMC reports a good quarter but cuts capex.
This means that not only will chip equipment companies lose much of their biggest market, China but also see their largest customer, TSMC, cut spending at the same time. This is on top of cuts from Micron, Intel and others.
This is perfect storm material….
From famine to feast and feast to famine overnight
The chip side of the market has gone from famine (shortage of chips) to feast (a glut of chips) as the economy has hit the brakes on demand.
The semiconductor equipment industry has gone from feast (backlog out the door and more orders than they could handle) to famine (with their largest market cut off overnight and largest customer cutting spend).
It is the rapidity of all this that will make heads spin and valuations collapse.
Even though these issues came on virtually overnight they are going to take a very, very long time to adjust to and there really isn’t a good way to fix them other than let time play them out.
The glut will take time to be absorbed and it will take a very long time for other regions to make up for what China has been buying to expand capacity.
Is the China embargo the solution to the glut?
In a perverse way, the embargo on equipment sales to China will obviously slow the flow of chips out of China and could work to reduce the excess supply that many, including TSMC, are worried about.
We have seen before, in the case of Jin Hua, when US companies leave overnight the fabs come to a halt for lack of support.
Of course, the fabs will try to keep going but will start to unravel without spare parts, service and upgrades very quickly.
A short reprieve from China Sanctions
A number of chip companies that are not China domiciled have gotten a 1 year reprieve in which they can still obtain equipment and parts for their China operations. Among them is TSMC, announced on their call last night. The bigger question is will the reprieve be extended a year from now or will that be the end of the line?
If I were a non Chinese company with an operation in China I would be wondering if its time to “get out of Dodge” before things got worse….
Maybe I won’t put more money into China because of an uncertain future.
All this makes fabs in the US and anywhere but China look very attractive.
So far it appears the bleeding edge is targeted
So far, from what we have been able to determine, the sanctions appear to be focused as announced on leading edge technology.
There is still a lot of dust to settle but leading edge is certainly a big percentage of the most profitable business for most companies.
Things will likely come down to a case by case basis with the intended customer likely playing a big part of whether a license would be approved.
Payback from China?
We have spoken previously at length about the role that rare earth elements play in the electronics industry. Everything from coatings on dep and etch chambers to batteries for cars. It’s not that China has the only rare earth elements on the planet it’s that they are cheap to the point where mines and other sources in the US and elsewhere couldn’t compete.
China could easily cut off rare earth elements, especially those used in the semiconductor industry and it would take a very long time to find alternate sources.
Just as important are sub-assemblies made in China. One example is the plethora of products that comes out of Shenzen. As an example, Advanced Energy (AEIS) makes RF and DC power supplies for the semiconductor equipment industry in China and China could halt the export and shut down a big piece of Applied’s and Lam’s business to other countries.
A US equipment manufacturer recently told suppliers that it was still OK for them to ship sub-assemblies out of China for use in US made tools (until China cracks down on that).
The bottom line is that China is a big part of the supply chain for US semiconductor equipment tools and could cause a lot of damage and halt other production Payback is a B…..
Smaller players will get shut out as industry contracts
As demand for chips slows down, TSMC will recapture all that business that was overflow and “allowed” second and third tier fabs to get because they couldn’t handle it. TSMC will want to keep its fabs operating near 100% capacity and will mark to market to get that to happen.
Companies like Global Foundries which only turned a profit when demand went crazy are the most vulnerable in a glut when customers run back to TSMC. Contracts won’t matter.
The stocks will bounce around quite a bit depending upon that days news flow.
We would expect a significant downdraft when companies take a significant haircut to their projections for the December quarter. We see 20% or so revenue cuts in some cases.
Obviously a lot of hot air has come out of what were overheated chip stocks making the valuations look more attractive but it’s clear that there is more bad news to come. Uncertainty will remain and the outlook for 2023 is clearly for a down year, it’s just a question of how far down.
We are likely to see some short-term rallies or dead cat bounce blips but the overall vector remains on a downward trend.
About Semiconductor Advisors LLC
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specializing in technology companies with particular emphasis on semiconductor and semiconductor equipment companies.
We have been covering the space longer and been involved with more transactions than any other financial professional in the space.
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