Is the slowdown in US tech bad news for Malaysian tech?

Is the slowdown in US tech

Is the slowdown in US tech : tech companies have enjoyed a period of unprecedented growth throughout Covid. Growth which was shar with its peers around the world. Including Taiwan. Since then. Most workstations have been upgrad and most people have start to go outside. Putting a damper on growth. The question then becomes: “Are the reduced earnings only limit  to American tech companies or will it have a feedback effect on.

Is the slowdown in US tech bad news for Malaysian tech?

Taiwanese and Malaysian companies?”

The slowdown in America comes on the heels of rate hikes to levels not seen since pre-global financial crisis. Rather than the rate itself. People and companies were caught off guard by the speed with which hikes have been announc. From a near-zero rate of 0.25% in January to now 3.25% (as of writing in end-September 2022). For the tech sector, this meant disappointing growth numbers, even negative growth in the case of companies like Netflix. This was due to slowing growth in consumer spending as people save in anticipation of a recession.

How does this affect Taiwanese tech companies?

Looking at Apple Inc’s three biggest suppliers (Table 1), we can see that a significant portion of their revenue comes from Apple. This suggests that there is a danger of order cancellations, resulting in a significant fall in revenue.

In terms of revenue, Apple’s earnings lags behind that of its suppliers. The lag, however, makes sense, considering how Apple must make orders in anticipation of sales volume. Even when considering the healthy buffer of inventory. They keep to ensure supply chain resilience. Orders will still likely be cut if Apple expects a slowdown.

And it’s not just Apple’s direct suppliers who feel the pinch, a cut will likely affect all companies down the supply chain. This includes Malaysian manufacturers such as Inari Amertron Bhd who mainly supplies components to Broadcom Inc, another one of Apple’s components suppliers, illustrating the interconnectedness of companies in the supply chain. Hence. Any anticipat slowdown in the tech sector will likely be felt by companies further up in the supply chain first.

Given current market conditions, we believe that investors have priced in the pessimistic outlook of the tech sector and global economy more broadly. This is consistent with the short-term result of orders being cut by finish electronics manufacturers such as Apple. Presenting an opportunity for investors to enter the tech market in both Malaysia and Taiwan.

But it’s not all bad news for Taiwanese component manufacturers in the short term. Taiwan Semiconductor Manufacturing Corp Ltd (TSMC) has notably escaped the earnings downgrade suffered by other upstream manufacturers.

Why is that?

A couple of theories. First. Companies such as Advanced Micro Devices Inc (AMD) and Nvidia Corp might be legally obligat under a contract to receive all the allocation they’ve reserved for a set period of time. So even when there is a slowdown in the short term, they may not be able to respond quickly. This is further exacerbat by the fact that both chip designers conversely increased their allocation on the heels of a silicon shortage we’ve experienced throughout Covid.

The second theory revolves around supply chain resilience. In many cases, TSMC may be the only silicon fabricator that can produce chips that meet the designer’s specifications. So, if they were to give up allocation, these companies might not be able to increase order volumes in the future to meet demand. Hence, despite a short-term slowdown, they might have to make choices in anticipation of future long-term demand, making it unresponsive to acute shocks.

Additionally, many Taiwanese component manufacturers may not have American ones as their main clients. For some, their main clients are in Asia, companies such as MediaTek Inc for example mainly provide components to Samsung Electronics Co Ltd and Xiaomi Corp. The possible lack of dependency is made even clearer when. We consider the composition of American Tech companies that primarily focus on providing software and cloud-bas services. Microsoft for example mainly works with SK Hynix Inc and AMD to supply components for their data centers.

While both companies produce computer hardware,

they’re distinguish from Taiwanese companies by their position in the supply chain. TSMC may produce the CPU (central processing unit) and GPU (graphical processing unit) core. But it’s still up to AMD to package the chips and put it on a substrate before it’s ready to be put in a server.

Even when we consider the possibility of an invasion. We would argue that tech companies especially are well-equipp to weather the storm. In the case of Foxconn, they’re currently working with Apple to expand operations in India, creating a supply chain that’s more resilient to changes in Chinese policies. In the case of TSMC. They are set to be one of the main beneficiaries of subsidies given out under the CHIPS Act. Receiving US$76 billion (RM356.44 billion) alongside Intel Corp and Samsung to build factories in Washington, Texas and California.

How do we take advantage of this?

We believe that Taiwanese and Malaysian tech companies, like most other ones, have already taken the brunt of recessionary fears, reflected by their share prices. Hence, despite a global recession on the horizon, we believe that the tech sector specifically will outperform their peers in America.

In the medium term. An increasing number of commodities are expect to ne  advanc  integrat circuits (ICs) to function. From electric vehicles to smart home appliances. Even toasters are looking to be connect. This necessitates the use of ever more advanced ICs. We believe that this view is consistent that of the American government as reflected in the signing of the CHIPS act, pointing towards an increase in earnings for Taiwanese companies. In the long term, there is the ever-looming spectre of a Chinese invasion.

However, bear in mind that companies will need years to relocate their supply chains away from Taiwan and its companies. Thus, giving investors plenty of time to catch warning signs and diversify their portfolio. But in some cases. Even though companies are moving production to other regions. Those factories might still be operat by a Taiwanese company. Such as in the case of TSMC and Foxconn.Is the slowdown in US tech bad news for Malaysian tech?

About the Author: AKDSEO

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