News of financial market gyrations has an impact beyond the effect on individual savings or the ease with which businesses can obtain credit. The type of volatility we have experienced from the global arena to within sectors of the Electronics Industry lends valuable insight to the structure of our industry. And, put in practical terms, informs strategy and demand forecasts. For this reason, we can explore the trends and look at the volatility as a testing ground for determining which correlations are real versus spurious, and then gain new insight into how the significant growth in the Electronics Industry has changed the dynamics of our market sectors.
Macro economics as a gauge
During the past few years, and particularly in 2007, the Electronics Industry has been characterized as having entered a ‘maturation phase.’ This means that the nature of the economic cyclicity (growth, unit and revenue forecasts) pattern for the Electronics Industry is in tighter correlation with the Global Gross Domestic Product (GDP). Also, along with reaching a ‘maturity’ point, comes the tempering of peaks and troughs in the traditional cyclicity for the Electronics Industry in toto, as well as for individual sectors (though some sectors are still experiencing more dramatic patterns as they approach maturity along different timelines).
[…] as the semis [sic] industry has matured over the course of the last few years, it has generally brought with it improved financial metrics for many of the industry leaders in terms of cash balances and margins, outside of challenging areas such as memory. (Lehman Brother’s Global Semi Handbook 2008, p.9)
In the recent past and present forecasts from the International Monetary Fund (IMF), the Year-over-Year (YoY) Global GDP growth has been between 1.5% (in 2001) and 4.1% (in 2000), with an average of 3.1%, and estimates of 2.6% for 2008 and 2009. After the devastating 2001 crisis, when YoY revenue growth for the Semiconductor Industry was at -32%, 2002 brought a modest recovery of 1.3% which closely correlated with the Global GDP of 1.9%. 2003 and 2004 were double digit growth years, followed by more tempered and sustainable growth rates of 6.8% in 2005 and 8.6% in 2006.
Following on the tight correlation last year between Global GDP, 3.7%, and the Semiconductor Industry, 3.5%, the Semiconductor Industry is actually forecasted to surpass Global GDP in 2008 with revenue growth by moderate levels. Current estimates continue to be revised downward from an earlier 2008 forecast of 4% to now be between 2 and 3.5% for 2008 (Global GDP is estimated to be between 1.8 and 2.6%). Of particular interest is the chance for a 7% growth during 2009, though momentum is not expected until after the first Quarter of 2009 (1Q09) (sources: Lehman Brother’s Global Semi Handbook 2008, p.17; www.eetimessupplynetwork.com/210800761; www.eetimes.eu/design/211100031).
The Why’s and What For’s of macro data
Why are macro data important?
Perhaps the most important aspect of macro data is the perspective that can be gained into present economic conditions and demand cycle forecasting. Anchoring to a sound current economic perspective for the industry allows for reasonable expectations and well-informed strategic decision-making, particularly in gauging the appropriateness and health of one’s supply chain and partnerships within and across sectors in the industry.
How did the industry ‘mature’?
For purposes of understanding the importance of macro data, we can understand maturation in the Electronics Industry as having occurred over time as electronic components proliferated into all of the main economic sectors, and especially into consumer end-products. The double-digit growth cycles that our industry has experienced, and particularly for semiconductors, are the evidence of these market gains and penetrations. The question being explored by industry analysts is the sustainability of this type of growth and the forewarning of more moderate growth level expectations as markets become more saturated.
What do macro data tell us about our markets?
As a result of the extensive penetration into the consumer end-markets, the Electronics Industry, rather than ‘spreading the risk’ across larger sectors, has become more closely tied with consumer confidence and consumer spending patterns. Since the end-markets for the majority of today’s chips go into products purchased through consumer (and business) end-markets, the health of consumer (and business) spending, are critical to forecasting (for manufacturing, inventory, and sales). Consumer and business spending (consumption and investment) are two of the five variables that determine a country’s (or global) GDP growth. If consumer or business spending/investment in goods are down, then the Electronics Industry growth numbers will also be down (cf. www.eetimessupplynetwork.com/210700217; UBS Investment Research: Semiconductor Sector 6 October 2008).
How do macro data and semiconductor forecasts relate?
As consumer (and business) spending and confidence drop, demand drops as well, meaning that global spending slows. As a result, IC forecasts drop because the demand for end-products that incorporate ICs goes down. However, some IC market sectors are forecasted to maintain and even increase in growth, such as MCUs (due in part to sustained levels of PC unit shipments during 2008 thus far as well as the proliferation of medical equipment, among other sectors) (sources: www.eetimes.eu/germany/211200262; www.eetimessupplynetwork.com/210800761). MCUs’ rosier outlook is also better news for the PC supply chain. In this manner, we see the obvious connection between the upstream and downstream segments within the Semiconductor Industry and therewith, the Electronics Industry as a whole (cf. this issue of MarketWatch Quarterly, “Will Reworked Balance Sheets Rebalance the Power in the Semiconductor Supply Chain?” and “The IC Landscape and Sector Implications during the Economic Downdraft” for closer explorations of changes to the structure and balance of power in the Semiconductor Industry).
Do ‘maturity’ and economic downdraft preclude growth?
Simply put, no. Under the present global economic conditions, growth itself needs to be understood as occurring at a more tempered rate. Given Global GDP as a baseline by which we can measure expected, normative growth, forecasts above Global GDP are inherently noteworthy. Obviously in regions and sectors where confidence is greater and spending is less restricted, growth opportunities can be found. Perhaps less obvious is that emerging markets, despite their lower individual consumer spending power, represent significant unit growth opportunities, especially during the volatile economic situation facing the established global economies of the G7.
Additionally, some industries outside the consumer products realm, such as aerospace, military, medical, industrial, networking/communications and automotive are continuing to increase the number of chips and components in their products, thereby representing other significant unit growth opportunities. The alternative energy industries, such as solar and photovoltaics (PVs) in particular, are poised to contribute significantly to future growth as demand for additional electronics and conversion devices increases with the rising demand for these new energy sources (cf. MarketWatch Quarterly, August 2008, “Power Play: Exploring the intersect of Solar and Semi”).
Unit and volume growth are critical points here, especially for the memory sectors, after the ASP collapse. Thus far, memory has not shown sustained ASP increases, which is indicative of longer term trends. Combined with the slowing global economic situation, the forecast is for increased consolidations (particularly merger and acquisitions (M&A)) among many in the IC sectors (http://www.investors.com/editorial/IBDArticles.asp?artsec=17&artnum=2&issue=20081003).
Changes within the Semiconductor Industry due to pressures on reducing capital spending and volume production combined with the skyrocketing costs of increasingly smaller geometries is pushing the value chain in different directions. “In the past, the exploding costs for pursuing a sub-65-nm CMOS fab would have caused companies to simply shutter fabs and adopt a fabless strategy. Now, […] companies are looking at mature fabs for exploring such technologies as mixed-signal devices, MEMS, and 3-D stacked die techniques.” (www.eetimessupplynetwork.com/210800423)
One example of changes to the dynamics of the industry is found in the ways in which companies are working together to increase value and reduce costs. For example, collaboration between IC design and electronics design automation (EDA) providers who cover manufacturing and design are increasingly important in reducing costs, increasing design feasibility and productivity (cf. “Economic [sic] takes its spot next to technology […],” DigiTimes Sept. 12, 2008). “While some M&A initiatives are undertaken from a position of desperation, many are launched from a mutual recognition by IC and packaging companies that they must pool resources to compete more effectively globally.” (www.eetimessupplynetwork.com/210800423)
Momentum is still out there but the economy is a game changer
Considering two chip bellwethers, Samsung and Intel, there is momentum but the momentum is couched in pronounced caution heading into 2009. Expectations are that consumer spending will continue to be dampened through the first half of next year (http://online.wsj.com/article/SB12
2394661650931441.html?mod=googlenews_wsj). However, Intel did just post third quarter (3Q) gains over the previous quarter, 1% in revenue and 3% in growth. “Intel said total microprocessor unit shipments set a record, and average prices excluding the Atom line [ultra small chips for netbooks] were flat. […]Mr. Otellini [CEO of Intel] disclosed that the company has begun initial shipments in the quarter of another high-profile chip line, code-named Nehalem, and will formally announce the product in November.” (http://online.wsj.com/article/SB122401486717933563.html)
iSuppli finds the silver lining elsewhere:
Perhaps the only good to come out of the economic downturn is that DRAM players will lack the cash to over-invest, thus curbing supply growth. […] This will bring an end to the oversupply on the market, a situation that has been so disastrous for the industry in 2007 and 2008. The market eventually will turn around – although not for a few quarters at least. However, the timing of the DRAM recovery will hinge on the timing of the economic recovery, which no one can determine at this time. (www.isuppli.com/news/default.asp?id=9225&m=10&y=2008)
Yet despite the ongoing problems with memory, new growth IS happening in the industry. Its trajectory is not going to follow the same dramatic patterning as experienced in the past, due to a number of variables (cf., some more detailed exploration of structural change to the industry in this issue of MarketWatch Quarterly, “Will Reworked Balance Sheets Rebalance the Power in the Semiconductor Supply Chain?”). The restrictions on capital spending and heightened M&A activity is already supporting interesting and sustainable momentum in IC and MEMS developments that will likely lead the industry within the next two years. Of note are the advancements made in the area of 3D ICs and through silicon via (TSV) technologies as well as the increased demand for sensors and other MEMS devices by automotive and industrial sectors (cf. the next edition of MarketWatch Quarterly for a more detailed consideration of the impact and importance of MEMS to the Semiconductor Industry).