Why Brexit Will Not Have A Significant Impact On The Semiconductor Industry

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British voters’ decision to exit the European Union (termed Brexit) took the world by surprise, wiping nearly $2 trillion from the global markets on the day the referendum results were announced. The British pound fell to a 30-year low against the US Dollar on the day. Though most global markets have recovered a bit from the lows witnessed on June 23rd and 24th, the uncertainty around how the whole situation plays out continues to cast a shadow on the global markets. The Brexit process by law will take two years to transpire, once the UK formally notifies the EU,creating a lot of economic, financial and political uncertainty about the British economy in the interim.

The PHLX Semiconductor Index fell over 9% in the two days following Brexit vote, though the index has recovered by approximately 5% in the subsequent three days. We believe that Brexit will not have a significant impact on the semiconductor industry, and here’s why:

  • Overall, the markets for semiconductors and semiconductor equipment are open, as most of the market participants are bound by the WTO Information Technology Agreement. Thus, most semiconductors and semiconductor manufacturing equipment enter most markets duty-free. [1]
  • The majority of semiconductors are manufactured in Taiwan, South Korea and Singapore.
  • According to the International Trade Administration, the U.S. accounts for 50% of semiconductor sales worldwide.
  • China is the biggest consumer of semiconductors, accounting for over 50% of the global semiconductor demand. Europe accounts for less than 10%, and we believe that Britain’s share in that is very minuscule. [2]
  • Germany, which is the 3rd largest semiconductor export market for the U.S, is the only European country that features in the 2015-2016 Top 10 markets for U.S. semiconductor exports, according to a recent report by the International Trade Administration.
  • Germany, Netherlands and Ireland are the 6th, 7th and 8th largest export markets, respectively, for U.S. Semiconductor Manufacturing Equipment.

Below is the revenue derived from Europe for some top semiconductor companies that Trefis covers. None of these companies derive more than 10% of their earnings from Europe. Judging by the facts above, our guess would be that Germany is their biggest market in Europe. Additionally, most of these companies are well diversified globally.

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*These companies do not report revenue contribution from Europe separately and group it as ‘other regions’. Thus, we assume that they derive <5% of their revenue from the region.

Conclusion

The semiconductor industry is pretty much insulated from Brexit. However, depending on the future negotiations between Britian and EU, any possible instability/ volatility in the  European region will eventually lead to weak consumer sentiment, which in turn can slowdown semiconductor demand in the future. Thus, we believe that the current decline in most of the above mentioned semiconductor stocks is more on account of weak investor sentiment due to Brexit than any real business threat.

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Notes:
  1. 2015 Top Market Report: Semiconductors & Semiconductor Manufacturing Equipment, ITA, July 2015 []
  2. China’s impact on the Semiconductor Industry – 2015 Update, PWC []