Tuesday, April 21, 2009

Survivors of Overcapcity in Chinese semiconductor industry

The capacity utilisation in Chinese semiconductor industry is at 40%. Check this article here for details.


Who will survive, the large plants or the small ones? The obvious answer and also suggested by the article was that this low capacity utilisation was a death knell for small and marginal players. There is an assumption here that smaller companies would be unable to compete on technology and price.

The costing that have been arrived for large companies have been with the assumption of close to a full capacity utilisation. These large companies with a larger components of fixed costs would not be able to sell the products at the same price in case of a recession. The smaller and flexible companies with their abilities to produce smaller batch sizes at the same prices as before. So, who would survive?

Besides this it depends a lot on the source of capital. A company with little or no borrowed funds would have no fixed interest burdens. They would definitely find it easier to survive. Assuming that the smaller players would probably be less leveraged this again gives the advantage to smaller players.

The large players however might be able to influence government policies. They might be able to extract interest set offs and other tax decisions. Being larger they of course have a louder voice to influence the government. However this alone will not be sufficient to ensure their survival . The demand needs to pick up faster. All said I would vouch for the smaller players surviving.