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Warnings from chipmakers point to wider economic slowdown


Demand for electronics devices is weakening, according to circuit makers at the base of the industry’s food chain, suggesting a long-predicted slowdown in global economic growth may be coming to pass.

September, the peak month for shipping tiny chips used to build everything from appliances to cars to phones and office equipment if they are to reach consumers and businesses by year end, has not seen its typical pickup after the summer holidays. In recent weeks, a series of U.S. semiconductor makers with global operations have begun to paint a worrying picture of a broad-based slow down in markets including autos and network equipment in regions ranging from Asia to Europe.

The weakness is centered in China, which functions as the electronics workshop for many finished products destined to ship worldwide. It may also be a sign of how pessimistic Europe’s retailers are feeling ahead of the key Christmas trading season, with the euro zone in danger of sliding back into recession. On Thursday came the remarkably blunt warning from diversified chipmaker Microchip (MCHP.O) of a broad-based industry downturn, or correction, suggesting worse may be in store as the latest corporate earnings season gets underway.

“We believe that another industry correction has begun and that this correction will be seen more broadly across the industry in the near future,” Microchip Chief Executive Steve Sanghi said of the sales fall-off in its latest quarter. Semiconductor analysts struggle to find chipmakers which might be insulated from signs of a wider economic downturn. “Any place to hide?” asked BMO Capital Markets analyst Ambrish Srivastava in a note to clients. “For the time, it appears not.”

Inventory worries

Shares in major European chipmakers suffered sharp declines on Friday, led by Germany’s Infineon Technologies (IFXGn.DE), which was off 5.8 percent. STMicroelectronics (STM.PA) lost 5.4 percent and ASML Holding (ASML.AS) gave up 3.5 percent.

Meanwhile, financial analysts who track inventory levels up and down the electronics industry supply chain have grown concerned by signs of a year-over-year build-up in inventories among sales distributors, contract and component manufacturers. While some stockpiling is inevitable in the current busy manufacturing season, the worry among investors is that this may be disguising even weaker demand for finished products.

Warnings have also come from niche semiconductor companies including EZchip Semiconductor, which cited weak orders from telecom equipment maker customers, and O2 Micro, which said several of its notebook PC customers were suffering weak demand. Microchip is considered a proxy for broader demand across the global semiconductor industry because it is a highly diversified supplier of electronic components to some 80,000 customers, which in turn use its digital and analogue devices in finished products.

The company is also an early indicator because it recognizes revenue when its distributors book sales to customers rather than simply when Microchip itself ships its products, meaning there is less lag in seeing fundamental shifts in market demand. China suffered a sales decline during the last three months where normally it would enjoy strong sequential growth compared with the June quarter, Microchip said in a statement.

Microchip responded by cutting back production levels in its wafer fabrication and test and assembly facilities, it said. The company expects to return to sequential revenue growth in two quarters, assuming that the current imbalance in supply and demand follow normal industry recovery patterns, it said.

Ahead of Microchip’s warning late on Thursday, the semiconductor industry was enjoying an upbeat year, overall. The 30-stock Philadelphia Semiconductor Index had gained 13.8 percent in the year to date.