Munich No car rolls, no plane takes off, no coffee maker simmers without chips. Hardly any industry can do without electronic components. In recent weeks, however, customers have been ordering far fewer semiconductors. Experts are alarmed because this could indicate a global recession.
“In the past, the three-month moving average of chip sales correlated quite adequately with the development of global gross domestic product,” says Peter Fintl, semiconductor expert at consulting firm Capgemini. Since the components are playing an increasingly important role in many products, they have recently become even more important as a yardstick for the development of the global economy.
If Fintl is right, the global economy will cool down in the near future. Some of the world’s largest chip companies have recently reported surprisingly bad business. Longtime industry leader Intel posted a loss of half a billion dollars in the second quarter.
Nvidia, the world’s most valuable chipmaker, also fell well short of its own guidance in the most recent quarter. That’s not all: The American memory chip specialist Micron warned of a weak next quarter. China’s largest semiconductor supplier SMIC announced that consumer electronics customers are freezing their orders, such as smartphone manufacturers.
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But does that mean the global economy is about to crash? “Since the early 2000s, there has been a steadily increasing correlation between the growth of the semiconductor industry and the growth of the global economy,” says Ondrej Burkacky of the consulting firm McKinsey.
Corona made the chip industry take off
However, that changed with the corona pandemic: “While the global economy collapsed, the semiconductor industry continued to grow significantly.”
The chip manufacturers recorded an increase in sales of around seven percent in 2020, while at the same time the global economy went down three percent more than at any time since the end of the Second World War. Last year, however, both the global economy and the chip industry grew exceptionally strongly.
Before Corona, the chip industry was about six weeks ahead of the global economy, according to the ZVEI industry association. It is unclear whether this is now the case again. However, there is some evidence that the chip industry is once again anticipating the development of the global economy – possibly even more than before.
Because the buyers have drawn consequences from the supply bottlenecks of the past two years. “Customers are now ordering for much longer periods of time,” says Peter Schiefer, head of the auto division at Munich-based semiconductor manufacturer Infineon.
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If the chip industry is still a leading indicator for the global economy, a slowdown is more likely than a crash. Because the industry is currently showing a differentiated picture, according to consultant Fintl. Demand for memory chips has recently fallen sharply. They are mainly used for smartphones and computers. Semiconductors for the automotive industry and other industries, on the other hand, are still in demand.
Supply bottlenecks: Good news for automakers
“Consumers and some professional IT users are preparing for difficult times or are already in them,” adds Klaus Schmitz, Partner at Arthur D. Little. Therefore, the sale of processors for computers and mobile phones go back.
At the same time, the industry has high order backlogs – and could benefit from the fact that chips are now more readily available. In many places, the assembly lines have stood still in the past two years because the components were missing. Last but not least, the automotive industry, which is important for Germany, continues to be affected by the lack of semiconductors. If the car brands are now supplied with chips more reliably again, this could ensure additional economic growth.
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According to Schmitz, chip papers on the stock exchange have generally developed in line with the market as a whole over the past almost three decades. With two exceptions: during the dot-com boom at the turn of the millennium and since the middle of the last decade. In recent years, the Philadelphia Semiconductor Index, or SOX for short, of the largest US-listed chip stocks has risen significantly faster than the broad-based Dow Jones index.
Chip stocks fall faster than the market
However, the SOX has fallen sharply since last autumn, much more than the Dow Jones. The SOX has fallen by around a quarter since mid-November, and the Dow Jones has lost less than ten percent over the same period.
“The decline in valuations cannot be used to draw one-to-one conclusions about overall economic development, because chip shares have been massively decoupled from overall economic development for around five years,” says Schmitz. Nevertheless, the current decline in chip ratings is of course also a reflection of the manufacturers’ weaker business.
Many chip manufacturers are currently cautiously optimistic. Vincent Roche, CEO of Analog Devices: “While economic uncertainty is beginning to affect bookings, demand continues to outstrip supply, resulting in a higher order backlog.” Like the US group, many semiconductor manufacturers still cannot meet all customer requests on time serve.
The current forecasts still assume growth in the chip industry this year and next, says consultant Fintl. The market researchers at Gartner have halved their forecast for the current year. However, the Americans are still expecting a sales increase of around seven percent.
The forecasts are too optimistic
Fintl does not believe in it: That is unlikely given the gas crisis in Europe, the dispute between the USA and China, the lockdowns in the People’s Republic and the high inflation.
Digitization and the energy revolution caused a higher demand for chips. The bottom line is that the global economic risks weigh more heavily for the industry.
The experts from Gartner expect the chip industry to fall by almost three percent in 2023. No matter how close the correlation may be, it doesn’t bode well for the global economy.
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