Chipmakers Facing Tougher Market Conditions

on Oct 4, 2012

The global economic slowdown has taken its toll on the chip industry. Large chipmakers from both sides of the Atlantic are facing tougher market conditions as European industrial output wanes and the pace of growth in emerging economies such as China slows.

Chip sales are usually strongest in the third and fourth quarters of the year as consumers increase their device purchases during the Festive season. Yet much of the industry, according to Warren East, chief executive of Cambridge-based chipmaker ARM Holdings (LON:ERM), is keeping its expectations low as economic uncertainty has affected consumers. Earlier this month, in an interview with The Financial Times, East said that he expected the usual second half growth to be muted this year, with chip manufacturers not expecting a significant increase in revenues due to the global economic slowdown.

Intel (NSQ:INTC), the world’s biggest chipmaker by revenues, was the first company to issue a sales warning due to the slowing PC industry. The California-based company reduced its third-quarter gross margin forecasts by one percentage point on September 7, from 63 per cent to 62 per cent. Intel said that its capital spending for the year was now expected to be below the low end of its previous forecast. Similarly downgraded estimates have been made by other companies whose profits are tied to chip manufacturing and sales.

!m[](/uploads/story/518/thumbs/pic1_inline.png)On 25 September 2012, the FT reported that German chipmaker Infineon Technologies (BER:IFX), Europe’s second-biggest semiconductor maker, also warned that sales could fall by up to 10 per cent in the final three months of 2012 as the uncertain economic environment saps clients’ investments. Infineon now expects fourth-quarter revenue to be “slightly down” compared to third-quarter revenues of 990 million euros, with a segment result margin close to 12 per cent of revenue. The company noted that the revised outlook will be along the lines of the low end of its outlook provided earlier this year. The German chipmaker said it would respond to the weaker outlook for sales and margins with measures to improve the company’s profitability. Details of those measures are expected to be announced on November 14, when the company will report its full-year results.

Chipmakers are trying to adapt not just to the current global economic conditions, but to the technological upheaval unleashed by stronger rivals on the market too. Once a leading manufacturer of chips for wireless devices globally, Texas Instruments (NSQ:TXN) has now been overtaken by its US rival Qualcomm (NSQ:QCOM), while new entrants, such as Nvidia (NSQ:NVDA) have appeared and device makers Apple (NSQ:AAPL) and Samsung (KRX:005930) have been designing and producing their own chips.

As competition intensifies, Texas Instruments (TI), currently the second-largest US chipmaker by revenues, announced that it is beating a retreat from the smartphone and tablet markets. The FT reported on 25 September 2012 that TI, whose chips are used in products such as’s Kindle Fire tablet, told an investor conference in New York that its chips for smartphones and tablets were “less attractive” with the emergence of a few large players and changing market trends. Accordingly, the company will adopt an approach of “reprofiling” its investment in those markets and concentrating on addressing the broader market of embedded processing.