Struggles in Taiwan Economy Signal Trouble for Semiconductor Market
Taiwan has had a difficult start to 2023 for a myriad of reasons, not least of which is the increasing tensions between the Taiwanese government and mainland China. The woes have stretched beyond the political front, however, as its export-dependent economy continues to struggle. Following a larger-than-expected market contraction in Q1, the country officially plunged into recession; and ever since, exports have continued to decline. In April, for example, exports decreased 13.3% in value from the year before. While this was better than initial forecasts that predicted an 18.15% decline, it still represents the 8th straight month that exports have decreased.
The picture as to why this is the case is complex. First, tensions with mainland China are having a tangible effect on the economy as it works to uncouple from the economic leader. In April, for example, Taiwan exports fell 22%, while the previous showed a drop of 28.5%. Beyond China, however, the tightening of monetary policy in all major economies is weighing heavily on electronic component demand. While this may be a net negative from a profit perspective, according to S&P, the weaker demand has created a much-need improvement in supply chain performance, with electronic component and semiconductor lead times dropping across the board for the second month in a row. As a result, automotive, consumer electronics, and other industries experiencing strain since the COVID-19 have seen relief from an inventory availability perspective. Paradoxically, however, with inflationary pressures and rising interest rates, most companies are not in a financial position to take advantage. This leaves Taiwanese suppliers such as Taiwan Semiconductor Manufacturing with the worst of both worlds: shrinking demand, combined with increased production levels, which will result in large quantities of excess inventory.
Early projections indicate that little relief is in store for the trade-dependent economy either. In a recent earnings call, Taiwan Semiconductor Manufacturing Co. warned that the second quarter will likely be the bottom of the current business cycle before demand recovers later in the year. Of equal concern, however, is the forward-looking issue regarding high-level Tawinese talent capable of supporting the creation of increasingly complex semiconductors. According to a recent article from Digitimes Asia, Taiwan is currently experiencing a severe shortage of professors in engineering disciplines. As a result, the talent pool of highly qualified students and professionals is both scarce and waning. Some critics are supporting a motion to allow for loosened restrictions on non-doctoral candidates to teach, but others warn that that result would be the country removing itself from the international semiconductor competition arena.
The ultimate takeaway is that, in 2023, the semiconductor market, especially regarding Taiwan, will remain very much in flux for the foreseeable future, and companies should not get complacent in their inventory levels or sourcing strategies. To maintain production schedules and hedge against risk, inventory supply needs to be owned and in hand, not left on the market assuming it will continue to be available.