It is shocking to read the news reports, where share prices of leading chip companies falling suddenly due to the announcement made by Microchip, where Microchip's CEO Steve Sanghi alerted that an industry correction has begun, which means the down part of semiconductor sales revenue cycle is approaching in the fourth quarter of 2014. This looks to be unfounded fear, because Microchip's performance is hardly a best sample of semiconductor chip market.
First of all, semiconductor sales revenue still has not reached its normal peak, what is seen in earlier cycles. Even if there is a correction it is going to be short lived. Let's look at how Microchip is different from many other semiconductor companies:
Microchip is a semiconductor chip company which generates significant part of its revenue from microcontroller chips, particularly in the 8-bit and 16-bit area. Microchip is one of the top three vendor in 8-bit and 16-bit microcontroller market. If you look at the latest sales trend in the microcontroller market, much of the growth in revenue is happening in 32-bit space, more so with the ARM Cortex M processor core-based microcontrollers. 32-bit ARM Cortex M microcontrollers are suggested as better replacement for 8-bit and 16-bit microcontrollers, and the embedded systems industry is quickly adopting to 32-bit ARM Cortex eco. According to the latest figures, the sales of ARM Cortex M based microcontrollers are growing at anything around 15-20%. Microchip is a leading player in 32-bit space too, but it doesn't offer ARM Cortex M based microcontrollers.
If you look at the sales revenue of ARM Cortex based microcontroller vendors such as STMicroelectronics, Texas instruments, NXP Semiconductors, Freescale Semiconductor, they all reporting good growth in revenue in microcontroller space.
In the 8-bit and 16-bit area, most of the microcontroller vendors are seeing more shipment growth but lesser sales revenue growth. In fact the 8-bit is nearly flat by revenue growth.
The microcontroller market variations is not that big enough to impact the overall semiconductor industry. The total microcontroller market in year 2014 can be estimated less than US$20 Billion, this is not even 10% compared to US$300 Billion of total semiconductor market. The Microcontroller market is in fact growing, more due to 32-bit ARM Cortex rather than 8-bit/16-bit chips . There are around 25 microcontroller vendors whose revenues going to be impacted due to any changes in demand of microcontroller chips. In a semiconductor market with easily around 500 to 600 semiconductor companies, the share of 25 is not much.
Most of the leading fast-growing chip vendors such as Intel, Qualcomm, Broadcom , Triquint, Micron are not at all connected to the microcontroller industry. Intel is slightly into it but it hardly matters.
And also one thing need to be observed is Microchip has grown its revenue faster to some extent by acquiring other semiconductor companies. Recently Microchip has not acquired any big size company, so the revenue it has earned recently is more from its organic growth.
The real fear for semiconductor companies, is in the growth of semiconductor manufacturing in China. China's share in semiconductor manufacturing is rising fast and it has the capability to produce chips at far cheaper cost than other regions and other companies. However it may take another 12 months or more before that happens in big way. Following China, India is also investing in semiconductor manufacturing. For Microchip, China is a big market, and even India is an important market. China's domestic chip production will impact many other companies.
The clear semiconductor market indicator may come in another few weeks, after many of the leading semiconductor companies announce their quarterly revenues. Its worth waiting for those results before linking microchip's outlook with overall semiconductor company and predicting growth/fall of semiconductor industry.
The holiday shopping in US may be a good indicator of positive things to come. If people are hesitant to buy wearables and IOT gadgets, then there is a threat of semiconductor revenue cycle approaching faster than normal.