Reading the semiconductor tea leaves

Short-term blip or the future of the global economy? China's government stimulates domestic sales of high-tech gadgets.

Published March 24, 2009 10:29AM (EDT)

On Friday, reported's David Manners, the Taiwanese semiconductor foundries TSMC and UMC rehired all their on-unpaid-leave production workers and started ramping up production of custom-made semiconductors.

As goes the global economy, so goes the global semiconductor industry, and the last six months have been brutal. The crash has been especially harsh in Taiwan, where exports of high-tech electronic goods, including semiconductors sent to China, have dropped off the proverbial cliff. Taiwan's economy shrunk by a huge 8.4 percent in the fourth quarter of 2008.

But TSMC is a company to watch. It pioneered the ruthlessly efficient semiconductor foundry business, manufacturing chips to order for chip designers across the world. Even the very best aren't immune from a global recession, but TSMC's vaunted flexibility means that the company's quarterly reports are one of the first places to spot a semiconductor turnaround. If TSMC sees orders picking up, it is worth wondering why.

According to another report by Manners, TSMC cited "renewed Chinese ordering" as a contributor to future revenue growth. Manners also quotes two semiconductor analysts who claim that "demand for chips (handsets, PCs and white goods) is increasing in China due to its stimulus package that included coupons and discounts for electronic goods."

China's exports are still falling -- implying that this new Chinese demand is driven mainly by domestic consumption. While consumers in the U.S. and Europe are holding on tight to their cash, Chinese consumers seem to be stepping up their purchases of semiconductor-laden phones and appliances.

It is still far too early to say how meaningful this news is. The Chinese stimulus could provide just a short-term bump as it works through the system. It stretches credulity to imagine that China will be able to shake off the global recession and reorient itself effortlessly onto a path of domestic-demand driven economic growth.

At least one technology stock watcher, Barron's Eric Savitz, is skeptical that a recent uptick in chip company stocks will sustain itself:

Morgan Stanley analyst Mark Lipacis ... notes that one factor contributing to the demand pickup ... has been China's rural economic-stimulus program, which includes 13 percent rebates for a variety of electronics products. But he thinks the Chinese distribution channel may be building inventory too rapidly, creating earnings risks for the chip makers.

If the only reason Taiwan's chip-makers are starting up production lines again is due to an artificially induced new-phone spending spree in rural China, then their fortunes are still teetering on the precipice and there's nothing to learn about the future health of the global economy from this exercise in tea-leaf reading. But the hint of a future where Chinese consumers drive the global economy, instead of American shoppers, is still tantalizing.

By Andrew Leonard

Andrew Leonard is a staff writer at Salon. On Twitter, @koxinga21.

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