Today’s scenario is very unlike the plunge during the Financial Crisis, which blew over in no time.
This is an edited transcript from my interview with “This Week in Money” by HoweStreet.com. You can listen to it here.
Semiconductor sales have plunged about 22% from the peak last October. That peak was the end of a long spike that started in 2017. When you look at the chart, you see the surge in semiconductor sales that lasted for a year and a half. And then it’s just a straight line down essentially, back to July 2017 levels. And semiconductor sales have been stuck at these levels now for five months. Compare that to the 39% plunge during the financial crisis.
During the financial crisis, semiconductor sales fell off a cliff within a few months, and then bounced off instantly. It’s a perfectly V-shaped recovery. And a few months later they were back up. So this was just a disturbance in financial confidence, when you think your bank might not be open tomorrow, you’re going cancel your orders and see what happens. And once people figured out that’s not what was going to happen, things sort of went back to normal in terms of semiconductor sales.
But this time around, there is no sign of a V-shaped recovery. This time around, it has been five months in a row at these low levels, after plunging this far and very suddenly. So it’s a very different scenario. This is not a confidence-type scenario. There are some real issues there.
Semiconductors go into everything. If you’re buying a hairdryer today, there’s a chip in it. And if you’re buying toaster, it has a chip in it. A lot of products have a lot of different chips in them. And among the products that have the most ships are cars. They have chips that govern everything, the whole engine management system, automatic transmission, the emission control system. You have the common little things like power windows whose motors and buttons are governed by chips. And there are specialty manufacturers that make those chips.
Now, car sales are a big part of global business, and they have plunged in China, the largest market. They’re down 12% in China year-over-year. They’re down in the US for the third year in a row, not by much, by a couple of percentage points a year, but it’s the third year of declines.
In India, the fifth largest market, vehicle sales have plunged by 25% because they have a shadow-banking financial crisis going on. The shadow banks are heavy into financing vehicles, and that system is now very vulnerable. So auto sales just collapsed in India.
And in Europe, auto sales are down about 3% year over year. In Canada, auto sales are down 5.5% year over year. So it’s global.
And this has an impact on component makers and on everybody in the industry and therefore on semiconductors. It’s a phenomenon that started in a major way late last year when vehicle sales in China started heading south in a very hard manner. In India, it started this year. In Europe, it’s been going on for a while. In the US, it has been three years. So this is unrelated to the trade wars. It’s just a maturing market globally that has its own problems that are not going to get resolved any time soon.
Another place where chips are used heavily, and there are a lot of products out there: smartphones. Smartphone sales globally are now on the decline. Last year, they were stagnating. It’s a maturing business. This year, they’re in decline. In the EU by 5%, in North America by 4%, in Japan by over 6%. These are pretty big declines. And in China too. So in that take some of the demand for chips off the table.
PCs and laptops are a big destination for chips. The first quarter, sales were down. In the second quarter, sales ticked up a little bit, and now we’ve got Microsoft’s Windows 7 going out. So there’s an upgrade cycle going on, and so PC and laptop sales will likely be pretty decent for the rest of this year.
Global IT spending for hardware is also down and is expected to fall further. Software spending is good, but hardware spending isn’t, and it is hardware that chips go into.
And in 2018, the crypto-mining industry got hit hard. The crypto-boom collapsed, and crypto-miners cut back and stopped buying the crypto-mining rigs, the special computers with powerful chips designed to mine cryptocurrency. So they overproduced chips for these crypto-mining rigs, and there was a huge pile of inventory of these chips and rigs out there, and demand for them just collapsed.
But then there’s the China-US trade-war debacle. Huawei is a big buyer of chips, and the export controls were aimed at that company. But in anticipation of these tariffs and export controls, Huawei and other companies on both sides of the Pacific, so in the United States and in China, stocked up on products trying to front-run the tariffs and export controls.
Huawei, for example, stocked up to one year’s worth of chips and other essential component ahead of time so that when the export controls hit, it wouldn’t run out of components.
By late 2018, that buying to increase stocks slowed down, as some of the tariffs and export controls hit. And these companies are now trying to whittle down their inventories. In the US, it’s the same thing. Our warehouses are just packed-full. And these goods are things that have semiconductors in them. But the strategy to stock goods in order to front-run potential tariffs has now run its course. And it was in part this front-run operation that caused the spike in semiconductor sales last year, and this spike is being unwound now.
So that’s not a collapse of the economy. We have some structural issues, with cellphone sales declining, and auto sales declining globally, and some other tech product sales declining. But then we also had the spike in sales last year caused by the efforts to front-run the tariffs that is now being unwound.
Chips are a good indicator of what’s going on in the goods-producing economy. We’ve seen the weakness in other parts, for example in the transportation sector. There are really fat inventories leading to a fairly significant weakness in current sales by manufacturers. And chip sales are an exaggerated measure of that.
Suddenly – I mean the signs had been everywhere for a long time and “suddenly” doesn’t really apply – the whole house of cards came tumbling down. Read… Is the Everything Bubble Ripe Yet?
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