Semiconductor companies like Intel or AMD reeling from the coronavirus downturn are likely to balk at big layoffs for fear of missing out on "a demand snapback," a Wall Street analyst said Monday.
Chip companies are expected to take a hit like the rest of the tech sector as the pandemic takes its toll on the global economy, but the industry may be reluctant to pull back production and cut jobs to avoid missing the boat when demand returns, UBS analyst Timothy Arcuri told clients in a note.
For many chipmakers, the "penalty of missing a demand snapback" could be "more severe than pulling on the supply chain and holding some excess inventory," he told clients in a note.
Arcuri's insights were based on a conversation with Ernie Maddock, a veteran tech executive and the former chief financial officer of Micron, Riverbed and Lam Research.
Many chip companies, including Intel, the world's biggest semiconductor maker, had been struggling with production issues before the coronavirus escalated.
While the tech market is bracing for a demand slump, chipmakers were already struggling with the inability to meet demand before the pandemic. Unlike in previous downturns, the chip industry is facing "a supply and demand shock at the same time yielding many uncertainties for management teams," Arcuri wrote.
"Demand side visibility is very limited but supply side constraints are clear," he said. That's why "companies are not doing anything to slow down and rather are more likely pulling more aggressively to provide comfort that near-term demand can be satisfied."
The need to be prepared for a market uptick may also make big layoffs unlikely at most chip companies since semiconductor makers given a tight labor market. Laying off employees only to be forced to rehire to meet market demand would likely be counterproductive, Arcuri said.
"Barring financial distress, rehiring is ultimately more costly than maintaining headcount that would be above optimal levels for even several quarters," he wrote.
In fact, many chip companies may even prioritize retaining employees instead of stock buybacks even though many chip stock prices have fallen sharply in the downturn.
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