NEW YORK - Broadcom has flashed a broader economic warning. The $105 billion chipmaker is being hurt by the U.S. ban on exports to China’s Huawei Technologies, but its problems go far deeper. The company is a supplier to everybody from mobile phone manufacturers to cable set-top box makers to the auto industry. When demand for chips declines across such a broad front, growth often slows too.

Broadcom is the product of dozens of deals. Boss Hock Tan has a reputation for buying rivals – some of which were the result of mergers themselves – and cutting costs. As a result, it’s one of the biggest and most sprawling semiconductor companies, producing chips for data storage, wireless, wire line and industrial uses.

The fact that it cut forecast 2019 revenue by $2 billion to $22.5 billion was bad enough. More worrying were Tan’s comments to analysts that the weakness was widespread. He said the downturn had probably started before the quarter began and had accelerated rapidly as the three months progressed. The U.S. ban on selling American chips to Huawei didn’t help, but it’s only part of the problem. The Chinese company accounted for only $900 million of Broadcom’s sales last year.

Chipmaking has always been a cyclical industry. Semiconductors are essential components in innumerable goods, so demand ramps up before industrial companies increase output and can fall sharply when growth slows as firms worry about getting stuck with excess inventory. Hoarding aggravates the cycle. Customers may order two or even three times as many chips as they need at the height of the cycle to ensure adequate supplies. That encourages producers to build too many factories and chips, leaving them vulnerable when clients cut back.

Tan’s description of a “very, very sharp and rapid contraction of supply chain and orders out there from our customers” suggests just such a turning point has arrived. The tech industry and its clients are global, so customers worried about Chinese-American trade tensions may be taking a cautious stance. Both economies show signs of slowing down, and the World Bank last week cut its forecast for global growth. After a decade of good times for the semiconductor industry – and most economies - Broadcom’s slowdown may be a harbinger of trouble ahead.

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CONTEXT NEWS

- Broadcom reduced its estimate of 2019 revenue by $2 billion, to $22.5 billion, on June 13. In a call with analysts, Chief Executive Hock Tan blamed a “very, very sharp and rapid contraction of supply chain and orders out there from our customers, especially our global OEM customers.”

- Tan said the reduction in guidance “extends beyond one particular customer.”

- In May, the U.S. Commerce Department ruled Huawei Technologies could not buy components from U.S. firms without government approval. Last year, Broadcom had about $900 million of revenue from the Chinese telecom.

- Broadcom also reported that revenue rose 10% year-over-year in its fiscal second quarter ended May 5, to $5.5 billion. That fell short of analysts’ estimate of $5.7 billion, according to Refinitiv data. Earnings rose 47%, to $691 million.

- Broadcom shares fell over 6% in morning trading on June 14.

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(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)

 

(Editing by Tom Buerkle and Amanda Gomez) ((robert.cyran@thomsonreuters.com; Reuters Messaging: robert.cyran.thomsonreuters.com@reuters.net))