US firms’ pullback in capital spending to hurt Asian chipmakers: JP Morgan
Long-term outlook remains bright for the sector, in part due to the AI boom.
Asia’s chip manufacturing sector is expected to take a hit from a potential pullback on capital expenditures (capex) by companies in the US, JP Morgan warned.
In a recent note by JP Morgan’s global market strategists, they said US corporate capex will likely be constrained in the face of falling pricing power, elevated wages, and high borrowing costs.
One notable impact, they said, is its blow on Asia’s tech sector which could bring short-term headwinds on the semiconductor manufacturers in the region, despite the AI-driven boost the sector is enjoying recently.
“On the supply side, rapid capacity expansion after the post-pandemic supply shortage has caused an inventory build-up and the correction is taking longer than expected, thus limiting price growth,” they said in the note.
“Turning to demand, apart from a potential U.S. demand slowdown, the stalled recovery in China, a major consumer electronics market, has created an unwanted headwind,” they added.
A pullback on capital spending by American firms will not only risk the US economy falling into a recession, but this could likewise drag Asia’s export-oriented nations like Taiwan, Korea and Japan.
Asia is home to some of the world’s largest semiconductor firms including Taiwan Semiconductor Manufacturing Co., Samsung Electronics and SK hynix. Asian economies also make up for more than half of the world’s semiconductor shipments and over 66% of all computer exports, according to JP Morgan analysts.
Despite the gloomy outlook for the near term, the market strategists still see the region’s favourable demographics of a growing middle class and rising Internet penetration, to continue to spur demand for Asia tech in the long run.
“Digitalization, the rising prominence of AI, and the proliferation of computing intensive processes across industries will (also) continue to drive the demand for semiconductors and tech products within the region,” they noted.
JP Morgan said they are seeing small signs of the semiconductor cycle bottoming out and Asia’s chipmaking sector is likely to have a meaningful recovery in the second half of 2024.