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Tech sector turns wary as 'chip dip' hurts sales

But business conditions remain healthier than past slumps, with mergers having reduced price competition

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Pedestrians walk past an Apple store in Shanghai. The iPhone maker faces stiff competiton and slumping demand in China, where smartphone shipments fell 15 per cent in the fourth quarter.

San Francisco

DON'T look now: Storm clouds are gathering over tech.

Chinese consumers have pulled back their spending, blowing a US$9 billion hole in Apple's recent quarterly revenue. China was again a culprit when Nvidia warned last month that its revenue would come in 20 per cent below expectations, though the graphics chipmaker also blamed slack demand from bitcoin miners and cloud data centres.

Intel, the big chipmaker, cited intensifying "trade and macro concerns" for financial results in January that did not meet expectations. And Samsung, another semiconductor powerhouse, said sales plunged 10 per cent in the fourth quarter because of weakening demand for its memory chips from data centers and smartphones.

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China, smartphones, bitcoin and cloud computing have been among the major drivers of the long tech boom, which in turn has powered the global economy for the last decade. The ingredient common to all of these sectors is computer chips, which form the brains of devices and whose ubiquity means they provide early signals about changes in supply and demand.

Warnings about a sales slowdown this year have come in recent weeks from big chip suppliers that also include Taiwan Semiconductor Manufacturing Co., Micron Technology and Western Digital. It's an abrupt reversal, coming on the heels of stellar results in 2018 for the business that gave Silicon Valley its name.

Last year, manufacturers shipped a staggering 1 trillion chips and other semiconductor devices, 10 per cent more than the year before, IC Insights estimates. But 2019 is shaping up to be a much different story, now that several important sources of chip demand appear to be dampening.

The notion that a chip dip could lead to a general downturn evokes memories of 2000, when one day tech had an unlimited future and the next it was crashing in what became known as the dot-com bust.

Back then, investors showed no mercy. Intel made what seemed a modest adjustment to its revenue forecast for the third quarter of 2000, saying it would be up 3 to 5 per cent instead of 7 to 9 per cent. The value of the company immediately fell by nearly 30 per cent over the next few days.

This year, with a similar downgrade, investors largely shrugged it off. Intel shed about 5 per cent of its value over a week.

While acknowledging the parallels to 2000, Gene Munster, research director for Loup Ventures, a venture capital firm, said: "I think it's different this time."

Back then, among the best customers for the established chip firms were startups, which had more dreams than revenue. As the startups faltered, the chip firms were imperilled. The storm lasted for years.

"These are all real companies now, with real customers," Mr Munster said. "People are willing to look past a few bumpy months."

Even if the problems do not linger, they are a reminder that demand is not eternal. That seems to be what happened with smartphones, which use multiple varieties of chips to run software, process data and connect to cellular networks.

Consider Apple, which gave a muted forecast in October for the holiday season and followed up early last month with its first full-fledged revenue warning in 16 years. The iPhone maker faces stiff competition and slumping demand in China. Total smartphone shipments fell 15 per cent in that country in the fourth quarter, according to research firm Canalys.

Michael Wolf, who surveys consumers annually about their technology and media usage for his management consulting firm Activate, said people seem to be shifting to lower-priced phone models and cheaper service plans.

But he said demand seems strong for digital subscription services like Netflix, video games, online advertising and business-to-business sales for companies like Microsoft. "From all of our research, I don't see some general consumer malaise," Mr Wolf said.

Late last spring, long-time tech industry watchers began picking up trouble signs in the market for memory chips, an essential component in computers that in decades past prompted trade tensions between the United States and rivals in Japan and South Korea. Makers of a key category called dynamic random-access memory, or DRAM, have suffered product shortages and gluts that whipsawed pricing and heralded changing fortunes for the broader industry.

During the dot-com bust of 2001, DRAM revenue plummeted 63 per cent while total semiconductor revenue fell 31 per cent, according to Gartner data.

But conditions changed dramatically over the years as manufacturers fled from the lack of profits, leaving three major DRAM makers - Samsung, Hynix and Micron. They have been slow to boost production, enabling them to keep their prices high. And they also benefited as memory became more important in smartphones, data center hardware and other products beyond the personal computers that once drove most sales. "The markets today are structurally different," Sanjay Mehrotra, Micron's chief executive, said in a recent interview.

Yet market cycles haven't disappeared entirely. DRAM prices peaked last June and began sliding, prompting Micron and Samsung to issue their recent profit warnings. DRAMeXchange, a Taiwan-based firm that tracks the market, predicts DRAM prices will fall an additional 20 per cent in the first quarter.

Memory chips "behave like onions or steel or any other commodity," said Jim Handy, a market researcher at Objective Analysis. "If there is an oversupply, prices fall."

For all the turmoil, industry executives and analysts said that business conditions remain a lot healthier than past semiconductor slumps. For one thing, a series of mergers has reduced price competition. Companies like Micron, which routinely lost money in past cycles, are expected to remain solidly profitable even if sales dip.

Beyond that, there is the glorious future. "Eventually the storm will pass and these companies - Nvidia, Apple, Samsung - will have a pole position in the next tech growth curve, including AI, health care, self-driving cars, 5G," said Loup's Mr Munster. "The curve is so exciting, so juicy, so full of opportunity." NYTIMES