Asian tech sector braces for the unwinding of inventories

From Intel to Nvidia, the global tech sector is bracing for new challenges. While rising costs continue to erode profits, demand may weaken due to sinking consumer sentiment and higher interest rates. As firms struggle to boost sales, they start to draw on their accumulated inventories and delay new orders. The trend is important for Asia as its economic cycle is very dependent on tech exports and, more generally, the cyclical demand of the global supply chain. Large Asian tech giants, such as TSMC and Samsung, have either scaled down production or have warned of the potential impact from destocking.

Among all, Taiwan is one of the most sensitive markets to the changes in manufacturing sentiment, which is a good barometer for Asia's tech cycle. From the difference between new orders and inventories PMI subcomponents, Taiwan’s destocking pressure is clearly high as it fell to the worst moment since early 2020. The poorer new orders and the large inventory pile-up mean Asia's tech sector will see a longing destocking cycle and a shrinking profit margin in the near term.

First, Taiwan's export growth seems to be holding up at 20% YoY in H1 2022, but it is mainly supported by inflation. The unit price of exports accelerated from 11.4% in December 2021 to 14.6% in June 2022, while volume slowed from 9.2% to 5.1%. Another clear signal is Taiwan’s exports orders are weakening from both the US and Mainland China, showing a synchronized move in cooling global demand.

Second, the share of inventory to total asset climbed from 18% in 2015-2021 to 22% in Q1 2022. Since the pandemic, firms have accumulated more inventories due to the supply chain disruption, a major shift away from the just-in-time model. The destocking cycle may increase from 3 months typically to 6-9 months given the higher level of inventories.

Third, Taiwan's tech sector will see slower revenue growth and possibly a shrinking gross margin. While the semiconductor industry still enjoys revenue growth of 30% YoY, the deceleration is clear for technology hardware firms from 12% YoY in Q2 2021 to 6% YoY in Q2 2022. As clients delay orders to sell inventories, more manufacturers will be forced to reduce prices and provide discounts, which will also have an impact on gross margin. This means the strong growth in revenue and gross margin in the past two years may reach a cyclical peak.

What is happening in Taiwan is also true for Asia. As the demand for consumer electronics cools down, semiconductors and other related components will also see tougher pressure. Other tech giants, such as Korea and Japan, will also experience weaker sales and higher stocks. The silver lining, though, is the demand for car chips, data centers, and advanced computing should remain resilient due to the structural green transition and digitalization. Still, the synchronized global slowdown is bound to hit Asia’s tech sector with rapid destocking and reduced export orders, which will have relevant consequences on growth.

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