Are the seeds already being sown for the next technology down cycle? Prospects of a downturn seem remote, given how strong demand for consumer electronics, PCs, and smartphones remain, and how major tech manufacturers are looking forward to a second wave of demand from long-suppressed corporate IT spending.
A new report by Standard and Poors, however, warns that profitability of Taiwanese technology companies may weaken after this year given their aggressive capacity expansion plans.
“High-tech firms face difficult choices to meet demand projections with appropriate capital expansion plans,” Raymond Hsu, credit analyst, said.
Mr Hsu said there are large capacity expansion plans in all three major sectors of Taiwan technology manufacturing: Contract chip manufacturing – where TSMC alone is planning to spend $4.8bn this year – flat-panel makers, and D-Ram memory chipmakers.
“There’s no outright crisis yet but there are certainly some risks. Although demand is very strong now, there are doubts about whether this strength can be sustained,” he said.
Some factors may help mitigate that risk. All three sectors cited by Mr Hsu saw some industry consolidation after the financial crisis, and the companies who are most aggressive in expanding capacity, such as TSMC, are also the ones who are best-equipped to ride out any downturn because of their size and technology leadership.
Then again, if the last D-Ram slump was any guide, it would not be until the market turns south that manufacturers would begin to admit they had over-expanded and that they wouldn’t make the same mistake ever again.
