Market ‘Uncertainty,’ Rooted in US-China War, ‘Has Become Global,’ Says Microchip CEO
The U.S.-China trade war “remain[ing] unresolved” has hurt Microchip Technology’s “end-market” demand “significantly,” said CEO Steve Sanghi on a fiscal Q2 call Tuesday. The company sells microprocessors and other components to various sectors, including consumer tech, automotive and industrial.
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Though market uncertainty “begins with U.S.-China trade friction, the uncertainty has become global,” said Sanghi. “The weak business conditions can be seen in all geographies.” Microchip’s Americas business in the quarter ended Sept. 30 was down 6.1 percent from a year earlier, and the decline was 12.9 percent in Europe and 12.6 percent in Asia, he said. The stock closed 4.4 percent lower Wednesday at $95.62.
Customers are coping by managing their “working capital” and “reducing inventory,” said Sanghi. Microchip will respond by reducing its capital spending for the year ending March 31 by $25 million compared with its August forecast, he said. Management thought the company had hit “bottom” in February when there was talk of an imminent “settlement” in the U.S-China trade war that didn’t materialize, he said.
“Join the party,” responded Sanghi to an analyst’s question asking how to advise investors “confused” about the geopolitical environment. Microchip’s largest customers are “heavily hit” with the Section 301 tariffs and are enduring “a lot of demand destruction,” he said. “Any time you make any kind of guess with some resolution of the trade dispute, it really hasn’t happened.”
World economies “largely run on inventory,” said Sanghi. Importers sourcing product in China and bringing it to the U.S. with 25 percent tariff exposure run the risk their customers won’t accept a price increase, he said. “The second risk is to bring the inventory to the U.S. and then there is a settlement announced,” he said. “No end customer will pay the 25 percent tariff, because the manufacturer brought it here with tariff at their own risk.”
The uncertainty “makes everybody stop in their tracks,” said Sanghi. All in the supply chain, from the raw materials to the finished goods, “draw down the inventory because they do not know what the landed cost is and what they can pass to their customers,” he said. “That is the impact we have seen in many, many of the markets.” Once there's “clarity on the tariff front, then you will see the rebuilding of that supply chain inventory, which would have a very positive effect,” he said.
The 25 percent tariff “doesn’t go away” with the Trump administration’s “touted” phase 1 settlement, said Sanghi. “They only agreed to not increase the tariff from 25 to 30, but there is some talk whether it’s in phase two” that the tariffs begin to go down, he said.
Microchip has no “direct insight” into the trade talks, said Chief Financial Officer Ganesh Moorthy. There’s a “good-faith effort to try to deescalate from where we are, and it may take more than one phase” to reduce or eliminate the tariffs, he said. Once the supply chain has the “finality” of a trade settlement and the assurance that there won’t be “another tweet” from President Donald Trump again raising tariffs, the inventories “will get replenished,” said Moorthy.