Semiconductors continue to power Malaysia
12 Aug 2023
The Malaysian semiconductor industry was born out of a crisis.
After Georgetown lost its free port status in the 1960s, Penang’s economy went on a downward spiral with per capita income dropping massively and the state’s unemployment rate surging to double-digits.
Amid the crisis, Penang’s political landscape changed after a new chief minister – late Tun Dr Lim Chong Eu – came into power in 1969, wresting Penang from Tunku Abdul Rahman’s Parti Perikatan.
It was Lim who transformed a poor Penang into a global economic powerhouse.
Following the success of the Shannon Free Trade Zone in Ireland, Lim envisioned a similar model in Penang that would attract major companies to locate their factories on the island.
In the 1970s, there was increased competition among large semiconductor firms, mainly those from the United States and Japan, causing relocation of their assembly plants to countries with cheaper labour.
Lim saw the opportunity and immediately jumped on the bandwagon.
He personally went on a tour to scout for high-growth electronics companies and by the early 1970s, he had brought in eight “samurais”, among which included Intel and AMD to establish their factories in
Penang.
In fact, Intel’s first plant outside the United States was in Penang.
From that point onwards, the Malaysian semiconductor industry has boomed and today, the country is the seventh largest exporter of semiconductors in the world.
With strong exposure to global semiconductor demand, the country cannot run away from the downcycles in the sector.
A drop in sales at Apple Inc or Intel Corp, just to name a few, is enough to trigger a domino effect on Malaysian semiconductor players.
In the past, the local semiconductor sector went through numerous downcycles, but interestingly, the sector has emerged stronger every single time.
The most recent downcycle, which began in late 2021, had caused global semiconductor sales to decline on a year-on-year basis for nine consecutive months. This has affected sentiment on the sector, particularly within the investing community.
Between November 2021 and mid-October 2022, the Technology Index of Bursa Malaysia slumped by 44.2%, steeper than the decline seen in 2018 and 2020.
While the index has seemingly bottomed out since October 2022, it has not seen a convincing rebound, indicating that investors remain wary about the industry outlook.
Speaking with StarBizWeek, AH AM Capital portfolio manager David Wong agrees that the recovery in the current market cycle is “more sluggish”.
“One reason for this is that we are comparing it to a very high base during the pandemic period where much of the global consumer spending has gone into the consumer electronics space.
“This is due to the need for remote working and the inability of consumers to spend into segments such as travel services. Hence, even if we were to have a recovery, it would take some time before we recover or even surpass those levels,” he says.
Softer demand from major economies including the United States and China and concerns about global macroeconomic conditions have been suppressing semiconductor sales.
The fact that the world’s biggest contract chipmaker, Taiwan Semiconductor Manufacturing Company (TSMC), warned last month that its sales for 2023 could drop by 10% has made investors more worried.
This was a more pessimistic outlook than what TSMC gave earlier this year, when it predicted a drop in the low-to-mid single digits.
By now, everyone knows that the year 2023 will be a negative year for the global semiconductor market.
The question is, with less than five months before 2023 draws to a close, will the semiconductor sector see a rebound in sales next year?
In a world where electronics are increasingly dominating consumerism, how long can the demand for semiconductors remain suppressed?
Semiconductors are everywhere. Right from electric vehicles (EVs) that require more semiconductors than an average internal combustion engine car to mushrooming data centres that power up the global cloud systems, semiconductors are simply unavoidable.
In fact, the craze for machine learning-driven ChatGPT and its reliance on supercomputers have intensified the demand for artificial intelligence (AI) chips.
The same craze drove the world’s largest AI chip producer, Nvidia, to top US$1 trillion in market value just a few months earlier.
It is, hence, not surprising that India – touted to be the world’s second-largest economy by 2075 – is also seeking to build its own semiconductor industry, including via tie-ups with Malaysian semiconductor
players.
Over the past decade, the chip sector experienced three downcycles that lasted between 13 and 16 months, with an average of 14 months. Subsequently, these downcycles were followed by longer upcycles that lasted between 29 and 32 months.
The World Semiconductor Trade Statistics (WSTS) is predicting a robust recovery in 2024, with an estimated growth of 11.8%. In contrast, global semiconductor sales are expected to decline by 10.3% this
year.
A numbe r of analysts have said that a cyclical recovery is imminent for the semiconductor sector.
AHAM Capital’s Wong opines that the semiconductor downcycle has bottomed out.
This is based on his conversations with local players in the industry as well as read-through from the latest results season in the United States.
Demand from data centres and smartphones to jump
“Companies such as AMD, Qorvo and Skyworks forecast that going into the second half of this year, the end-market demand from sectors such as data centres, personal computers and smartphones will
recover, albeit slowly.
“We opine that this will be the sweet spot to position for an eventual cyclical upturn in the overall technology sector,” he says.
Desmond Chong of UOB Kay Hian (UOBKH) Research also urges investors to “milk” the current opportunity to invest in semiconductor stocks before the cyclical upturn.
“Conditions for turning more bullish on the sector are ripe, backed by an improving earnings outlook in 2024.
“Additionally, local tech players are reaping the fruits following the supply chain reconfiguration of the multinational companies into Malaysia – whereby multiple billions in capital expenditure (capex) have been allocated for the expansion in the next 10 years which require the local ecosystem support.
“Meanwhile, the peakish US interest rate scenario, fruition from trade diversion and easing cost inflationary pressures are also setting the base for this cyclical sector to outperform again in the fourth quarter of 2023,” the analyst says.
Despite the downcycle that began in late 2021, AHAM Capital’s Wong highlights that industry players have been expanding their capacities.
In 2022, across the global semiconductor market, capex amounted to some US$181bil, more than 80% higher compared to the annual amount spent during the pre-pandemic years.
“While this amount is expected to normalise to some US$140bil this year, this is still materially higher compared again to the pre-pandemic years.
“Hence even if there is excess capacity across the various sub-segments of the semiconductor industry currently, investments are still ongoing to prepare for the next upcycle,” adds Wong.
A numbe r of Malaysian companies have also been busy expanding their operations in the past one year, in anticipation of stronger orders in 2024.
This includes Penang-based engineering services firm UWC Bhd.
UWC has initiated the construction of a new site in Batu Kawan with a cleanroom facility to cater to front-end semiconductor manufacturing as well as EV projects.
It also has invested to construct a new fabrication site in Taiping and is planning for another warehouse facility in Batu Kawan to expand its production capacity.
QES Group Bhd, which moved into a new manufacturing facility this year that has more than double capacity than its previous plant, is also planning for further expansion.
The test equipment manufacturer aims to build its second factory in Batu Kawan, on a two-acre piece of land it acquired two years ago.
QES managing director Chew Ne Weng has said previously that the Batu Kawan factory is likely to be completed by the early third quarter of 2024.
How fast the semiconductor market upcycle will take place depends on the recovery in global macroeconomic conditions and the improvement in business confidence.
An unexpected worsening of global economic conditions could further delay the market recovery.
Source: The Star
