WhatsApp:+852-69577225How does the Fed cut interest rates affect the semiconductor industry?
9/26/2024 9:58:56 AM
The Federal Reserve cut interest rates for the first time in four years
Interest rate cut is one of the important means of the Federal Reserve to adjust the economy. When the economic growth slows down, falls into recession or faces the risk of deflation, the Federal Reserve will reduce the borrowing cost by lowering the federal funds rate, that is, the interest rate of overnight borrowing between banks, so as to encourage enterprises and consumers to increase spending and investment, thus stimulating economic growth and improving employment. In addition, interest rate cuts are used to respond to financial market turbulence, stabilize market sentiment, improve market liquidity, and provide a hedge against external economic shocks.
Looking back at the time points of previous interest rate reduction cycles in the United States, including the oil crisis in the 1970s, the savings and loan crisis in the 1980s, the Internet bubble at the turn of the 20th century and the 21st century, the global financial crisis in 2008, and the global new coronavirus epidemic in early 2020, the Federal Reserve has done interest rate cuts in these periods. Therefore, we believe that this round of Fed rate cuts also reflects the fact that the US economy is in recession.
Generally speaking, the rate cut cycle in the United States is usually continuous. Historically, the average rate cut cycle in the United States has lasted 26 months, with an average rate cut of 6.35 percentage points. Of course, the above numbers are averages, and the actual rate cut cycle will vary depending on the economic situation and the Fed's policy objectives.
The impact of interest rate cuts on the semiconductor industry
The impact of the US dollar rate cut on the semiconductor industry is mainly reflected in the following aspects:
Stimulate semiconductor consumption and investment: Interest rate cuts usually reduce lending rates for consumers, thus stimulating consumption and investment. Consumers can get loans at lower interest rates when making big-ticket purchases, such as electronics, cars, etc. Therefore, it can be said that interest rate cuts can increase the purchasing power of consumers and businesses, which is likely to increase the demand for semiconductor products.
Enhance the profitability of semiconductor companies: For those semiconductor companies that borrow debt, once the loan interest rate falls, they will pay less interest, which will directly increase the company's net profit and improve its overall profitability. It is worth noting that this change will be directly reflected in the company's financial reports, and the reduction in interest expense will lead to an increase in the company's net profit. At the same time, the company's net profit margin and gross profit margin may also be improved as a result. This could improve semiconductor distributors' gross margins, as distributors are often plagued by low gross margin issues.
Enhance global market competitiveness: If the Federal Reserve cuts interest rates resulting in the depreciation of the dollar, then the price competitiveness of US semiconductor products in the international market may be enhanced, and foreign buyers will only have to pay less in their own currency to purchase US products. This situation may also affect the revenue statistics of multinational semiconductor companies in various countries/regions, specifically, in the period of US dollar appreciation, the revenue of other regions is converted into US dollars, which is more affected by exchange rate factors. At the same time, it may also have an impact on the ranking of semiconductor companies around the world.
Increased semiconductor capital expenditure: In a low interest rate environment, on the one hand, borrowing costs are lower, and companies can obtain funds at lower interest rates, on the other hand, traditional savings and investment methods are also lower yields. Therefore, semiconductor companies may look for higher return investment opportunities, and invest in new manufacturing facilities or upgrade existing facilities to improve production efficiency and competitiveness. In addition, countries are supportive of semiconductor investment at this stage. It can be seen that under favorable conditions such as preferential policies and low interest rates, the recovery trend of semiconductor investment will be more obvious.
Boost semiconductor M&A activity: Due to low financing costs, the low interest rate environment will also boost M&A activity. Semiconductor companies may use this opportunity to acquire new technologies, expand market share, or enter new market segments through mergers and acquisitions. Taking the trend of global semiconductor mergers and acquisitions in recent years as an example, after experiencing a trough period of semiconductor investment and financing and mergers and acquisitions, especially after entering 2024, the news of global semiconductor mergers and acquisitions is increasing.
At this stage, a new round of mergers and acquisitions seems to be coming, of which the third-generation semiconductor (gallium nitride) companies are quite frequent mergers and acquisitions, including specific mergers and acquisitions cases include:
In May 2024, Power Integrations announced an agreement to acquire Odyssey Semiconductor's assets, which will support the company's continued development of PowiGaN technology and enhance its GaN technology applications in the field of power conversion.
In July 2024, Guerrilla RF acquired Gallium Semiconductor's GaN power amplifier and front-end module portfolio to expand the former's GaN product line and accelerate innovation in RF technology.
In July 2024, Grofonde announced the acquisition of Tagore Technology's power GaN technology and intellectual property portfolio, which will enable Grofonde to accelerate the development of efficient power management solutions.
At the same time, mergers and acquisitions in the semiconductor field also have some regional characteristics, such as the development of Chinese semiconductor companies into a new stage. In the context of globalization, Chinese semiconductor companies have begun to acquire key technologies and market share through mergers and acquisitions, which has also accelerated their integration with the international market. With the changes in the international situation, China's semiconductor industry began to turn to independent and controllable development strategies. Semiconductor M&A activities in the region are correspondingly more focused on the integration of Chinese local resources and the improvement of Chinese local technological capabilities.
Semiconductor investor confidence: Interest rate cuts may generally increase investor confidence in the semiconductor industry as well as the overall market, which tends to lead to a rise in the stock market, which can provide more financing opportunities for semiconductor companies. For example, when the Federal Reserve announced the news of interest rate cut on the 18th, the US stock market rose straight, in which the spot gold rose nearly 20 dollars in the short term, and the US dollar index fell 40 points in the short term.
In short, the Fed rate cut has a positive impact on the semiconductor industry by reducing financing costs, stimulating demand and investment, improving profitability, and enhancing market competitiveness. Of course, these effects are also influenced by global economic conditions, industry cycles, technological developments and other macroeconomic factors.
Over the past four years, the Fed has raised its benchmark rate 11 times, from 0-0.25 per cent to 5.25-5.5 per cent. On September 18, local time, the Federal Reserve announced an interest rate cut, lowering the target range of the benchmark interest rate by 50 basis points to 4.75% to 5%.
Interest rate cut is one of the important means of the Federal Reserve to adjust the economy. When the economic growth slows down, falls into recession or faces the risk of deflation, the Federal Reserve will reduce the borrowing cost by lowering the federal funds rate, that is, the interest rate of overnight borrowing between banks, so as to encourage enterprises and consumers to increase spending and investment, thus stimulating economic growth and improving employment. In addition, interest rate cuts are used to respond to financial market turbulence, stabilize market sentiment, improve market liquidity, and provide a hedge against external economic shocks.
Looking back at the time points of previous interest rate reduction cycles in the United States, including the oil crisis in the 1970s, the savings and loan crisis in the 1980s, the Internet bubble at the turn of the 20th century and the 21st century, the global financial crisis in 2008, and the global new coronavirus epidemic in early 2020, the Federal Reserve has done interest rate cuts in these periods. Therefore, we believe that this round of Fed rate cuts also reflects the fact that the US economy is in recession.
Generally speaking, the rate cut cycle in the United States is usually continuous. Historically, the average rate cut cycle in the United States has lasted 26 months, with an average rate cut of 6.35 percentage points. Of course, the above numbers are averages, and the actual rate cut cycle will vary depending on the economic situation and the Fed's policy objectives.
The impact of interest rate cuts on the semiconductor industry
The impact of the US dollar rate cut on the semiconductor industry is mainly reflected in the following aspects:
Stimulate semiconductor consumption and investment: Interest rate cuts usually reduce lending rates for consumers, thus stimulating consumption and investment. Consumers can get loans at lower interest rates when making big-ticket purchases, such as electronics, cars, etc. Therefore, it can be said that interest rate cuts can increase the purchasing power of consumers and businesses, which is likely to increase the demand for semiconductor products.
Enhance the profitability of semiconductor companies: For those semiconductor companies that borrow debt, once the loan interest rate falls, they will pay less interest, which will directly increase the company's net profit and improve its overall profitability. It is worth noting that this change will be directly reflected in the company's financial reports, and the reduction in interest expense will lead to an increase in the company's net profit. At the same time, the company's net profit margin and gross profit margin may also be improved as a result. This could improve semiconductor distributors' gross margins, as distributors are often plagued by low gross margin issues.
Enhance global market competitiveness: If the Federal Reserve cuts interest rates resulting in the depreciation of the dollar, then the price competitiveness of US semiconductor products in the international market may be enhanced, and foreign buyers will only have to pay less in their own currency to purchase US products. This situation may also affect the revenue statistics of multinational semiconductor companies in various countries/regions, specifically, in the period of US dollar appreciation, the revenue of other regions is converted into US dollars, which is more affected by exchange rate factors. At the same time, it may also have an impact on the ranking of semiconductor companies around the world.
Increased semiconductor capital expenditure: In a low interest rate environment, on the one hand, borrowing costs are lower, and companies can obtain funds at lower interest rates, on the other hand, traditional savings and investment methods are also lower yields. Therefore, semiconductor companies may look for higher return investment opportunities, and invest in new manufacturing facilities or upgrade existing facilities to improve production efficiency and competitiveness. In addition, countries are supportive of semiconductor investment at this stage. It can be seen that under favorable conditions such as preferential policies and low interest rates, the recovery trend of semiconductor investment will be more obvious.
Boost semiconductor M&A activity: Due to low financing costs, the low interest rate environment will also boost M&A activity. Semiconductor companies may use this opportunity to acquire new technologies, expand market share, or enter new market segments through mergers and acquisitions. Taking the trend of global semiconductor mergers and acquisitions in recent years as an example, after experiencing a trough period of semiconductor investment and financing and mergers and acquisitions, especially after entering 2024, the news of global semiconductor mergers and acquisitions is increasing.
At this stage, a new round of mergers and acquisitions seems to be coming, of which the third-generation semiconductor (gallium nitride) companies are quite frequent mergers and acquisitions, including specific mergers and acquisitions cases include:
In October 2023, Infineon completed the acquisition of GaN Systems for a transaction value of $830 million.
In May 2024, Power Integrations announced an agreement to acquire Odyssey Semiconductor's assets, which will support the company's continued development of PowiGaN technology and enhance its GaN technology applications in the field of power conversion.
In July 2024, Guerrilla RF acquired Gallium Semiconductor's GaN power amplifier and front-end module portfolio to expand the former's GaN product line and accelerate innovation in RF technology.
In July 2024, Grofonde announced the acquisition of Tagore Technology's power GaN technology and intellectual property portfolio, which will enable Grofonde to accelerate the development of efficient power management solutions.
At the same time, mergers and acquisitions in the semiconductor field also have some regional characteristics, such as the development of Chinese semiconductor companies into a new stage. In the context of globalization, Chinese semiconductor companies have begun to acquire key technologies and market share through mergers and acquisitions, which has also accelerated their integration with the international market. With the changes in the international situation, China's semiconductor industry began to turn to independent and controllable development strategies. Semiconductor M&A activities in the region are correspondingly more focused on the integration of Chinese local resources and the improvement of Chinese local technological capabilities.
Semiconductor investor confidence: Interest rate cuts may generally increase investor confidence in the semiconductor industry as well as the overall market, which tends to lead to a rise in the stock market, which can provide more financing opportunities for semiconductor companies. For example, when the Federal Reserve announced the news of interest rate cut on the 18th, the US stock market rose straight, in which the spot gold rose nearly 20 dollars in the short term, and the US dollar index fell 40 points in the short term.
In short, the Fed rate cut has a positive impact on the semiconductor industry by reducing financing costs, stimulating demand and investment, improving profitability, and enhancing market competitiveness. Of course, these effects are also influenced by global economic conditions, industry cycles, technological developments and other macroeconomic factors.
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