With demand for smartphones and personal computers declining, large outsourced semiconductor assembly and test (OSAT) companies should fare better than their smaller rivals because of their better technological capabilities, more diversified product portfolios and financial flexibility on research and development, Fitch Ratings said.

The industry could see a short-term recovery in revenue after a severe downturn in the first half of this year, thanks to the arrival of new-generation smartphones and better demand for wearables and automotives, the international ratings agency said.

Larger firms, such as Taiwan’s ASE Technology Holding Co (ASE, 日月光投資控股) and US-based Amkor Technologies, should see faster growth and gain market share at the expense of Chinese rivals Jiangsu Changjiang Electronic Technology (江蘇長電科技) and Singapore’s Global A&T Electronics Ltd, it said.

Larger chip assembly and test companies have conservative leverage and have been diversifying to offer new products, such as wearables, automotive and Internet of Things, where demand is growing rapidly, it said.

These new products should make bigger contributions to revenues, Fitch said, adding that small consumer electronics and flexible hardware, such as foldable phones, would give large OSAT companies an advantage, as they possess the technological edge in system-in-package (SiP) and advanced packaging technologies.

Global smartphone sales are forecast to shrink 2.5 percent this year due to saturation in developed markets, an extended replacement cycle and a lack of eye-catching features in new models, Fitch said, citing figures from US technology research body Gartner.

PC shipments are likely to stagnate, in line with the previous eight years, it said.

OSAT companies rely heavily on the smartphone segment to drive revenue, Fitch said.

The ongoing US-China trade dispute and restrictions on US companies selling software and hardware to China’s Huawei Technologies Co (華為) could affect the financial recovery of Chinese OSAT firms in the near term, it said.

However, Taiwanese OSAT companies could emerge unscathed given their limited manufacturing activity in China, but they might still be indirectly affected by lower demand from US-based customers that are exposed to Huawei, it said.

Challenging conditions for the OSAT industry would last into next year, it said.

Most OSAT companies plan to boost capacity on expectations of businesses linked to 5G-ready handsets, but a concrete pickup in demand seems unlikely, as 5G coverage remains patchy in the UK, the US, Australia and other large markets, Fitch said, adding that China would start to roll out 5G next year.

Large OSAT firms would be at the forefront of 5G-related demand, as their advanced packaging capabilities are suited to 5G chips, Fitch said.

A protracted industry slowdown could hit smaller OSAT companies with less than 5 percent market share such as Powertech Technology Inc (力成科技), ChipMOS Technologies Inc (南茂) and Chipbond Technology Corp (頎邦).

They could seek merger and acquisition opportunities to expand their scale and strengthen their market positions, Fitch said.