Given the fundamental position of ICs to the Electronics Industry, understanding the strength and diversity of IC sectors and markets is critical to forecasting and understanding current and approaching trends. Additionally, these relative sector strengths are and will continue to dictate IC demand. While a number of sectors continue to be down due to the weak consumer confidence and global economic downturns, and memory ASPs continue to be troubling, there are silver linings as well as important growth opportunities within the IC landscape.
This article will synthesize the findings by numerous industry and financial analysts and consider how the various types of forecasts and sector data create a picture of the changing economic dynamics. There are some interesting and important findings based on macro effects to the IC sector that evidence significant changes to supply chains as well as to the composition of and competition within the Electronics Industry.
(This article is primarily based on a synthesis of the following sources: UBS Investment Research: Semiconductor Sector 6 October 2008; Citigroup Global Markets, EMS, Connector & Supply Chain Outlook 5 October 2008; Barclays Capital Equity Research Semiconductor Capital Equipment 2 October 2008; Lehman Brother’s Global Semi Handbook 2008 2 June 2008; other sources were consulted and cited as appropriate.)
Global and regional status
With consumer demand continuing to drop in numerous regions and across most product lines, capital spending outlooks are down for many, but not all sectors and regions. Investment, financial and industry analysts agree that this year’s holiday season and the first half of 2009 (1H09), particularly for the US, Europe and Japan, is expected to be “tepid” at best. Those businesses with greater exposure to the consumer sector are forecasted to be the most adversely affected while those exposed to “Industrial and Communications Infrastructure markets […] [are] to be relatively mild[ly affected].” (source: UBS Investment Research: US Semiconductors 6 October 2008, p.1).
On October 9, iSuppli, echoing the economic and financial forecasters, reduced their 2008E IC revenue forecast by 0.5% to 3.5%, “but warned of ‘significant potential downside if economic conditions continue to worsen.’” (www.eetimessupplynetwork.com/210800761). The annual forecast by the Semiconductor Industry Association (SIA) was recently released, “revenue will rise only 2.2% to $261.2 billion [in 2008] and then decline 5.6% to $246.7 billion in 2009 because of the financial crisis and economic slowdown. That will mark the first time since 2001 that global chip sales will fall” (www.purchasing.com/article/CA6617959.html?industryid=48405&nid=2863).
The recently downgraded forecasts for semiconductors are supported by the “below-seasonal 3Q08. […] Industry data points have recently continued to deteriorate and point to slowing demand. […] We [UBS] lower our semis industry revenue growth forecasts for ’09 and ’10 to +2% and +4% (was 4% & 5%). We see semi capital expenditures (CAPEX) fundamentals deteriorating and forecast a 25% YoY decline in ’09 (was -5%).” (source: UBS Investment Research: Semiconductor Sector 6 October 2008, p.1) The primary driver for these downward forecasts for the remainder of 2008 and through much of 2009 is the consensus among analysts and the International Monetary Fund (IMF) of a continued global recession in 2009 impacting the purchasing ability by consumers worldwide, and therewith reducing demand for the end products for which ICs are produced. Consensus is mounting for a recovery by or at least in 2010.
Semiconductor capital and equipment spending
Throughout 2008, capital spending has been decreasing in the semiconductor industry. This year’s estimates fall at a quarter (-25%) reduction in spending. Gartner reduced semiconductor CAPEX by the -25%, as cited above by UBS. Gartner is “predicting declines of 25.7 percent in 2008 and 12.8 percent in 2009 before a recovery in 2010.” (www.eetimessupplynetwork.com/210800761)
The effects of this reduction in capital spending are significant. The impacts will be felt from inventory levels to the structure of the entire industry’s balance of power as companies engage in a variety of consolidations, restructuring, merger and acquisition (M&A) activity, realigning supply chains, and shifting strategies to best manage the economic downturn. The forecast for 2009 is not generally improved, particularly as inventory builds and overcapacity continue along with shrinking demand, though some slight increases over this year’s drastic cuts are possible. Consensus points to 2010 as the most likely positive year for capital equipment and CAPEX spending rebounding (cf. “Will Reworked Balance Sheets Rebalance the Power in the Semiconductor Supply Chain?” in this MarketWatch Quarterly edition). Some of the important drivers for this rebound are based in specific memory IC upticks and new types of memory spends.
Interestingly, despite consumer and business retrenching on spending, PC unit growth has been steady and inline with expectations. All forecasters note cautious optimism for the sector and a read of surprise over the resiliency of this sector is noticeable. Despite this positive news, DRAM for PC OEMs has been downgraded to “negative” from “neutral” by many, including iSuppli, Gartner, and most financial analysts. However, SSD for PCs are expected to show increasingly healthy demand as conversion continues through 2010, so there are bright spots for some in memory, though not for DRAM. Notebooks (NB) have shown particular strength and have acted to offset the slower PC sales. As ultra-light, ultra-mobile (‘netbook’) devices continue to gain momentum and will perhaps drive the sector, the demand for microprocessors (MPUs) will remain healthy and support growth for ICs more generally (www.eetimes.eu/semi/211100080). Computing represents roughly 40% of semiconductor revenues.
Figure 1. Market Sector Percentages for ICs by Revenue
Wireless is also mostly inline with expectations but some increased softening is mounting as companies are scaling back releases of new mobile devices (e.g., even RIMM delayed the release of the anticipated Blackberry Bold with 3G until the first week of November). Meanwhile, emerging economies and these new consumers are increasing volume demand for low-cost handsets which is supporting IC volume growth. 3G proliferation and increasing demand for high-end smart phones are also positively contributing to the forecast for IC wireless components. Wireless represents roughly 20% of semiconductor revenues.
The hardest hit sector, unsurprisingly, is consumer electronics. The previously high growth digital TV market (with high investment and inventory builds earlier this year, especially for LCD panels which are equipped with LCD driver ICs) is experiencing significant downtrends. Declining ASPs coupled with inventory backlogs and softening demand point to continued negative forecasts through the first half of 2009 (1H09). Consumer electronics represents roughly 20% of semiconductor revenues (an increase of 2.8% over 2007 according to Semiconductor Industry Association (SIA) and Lehman Brothers).
The automotive sector has been experiencing record declines as an industry (off by almost 25%) and does not show any immediate signs of rebounding; rather, the softening seems to be spreading globally. On 26 November, iSuppli issued revised forecasts:
US car sales in 2008 are set to drop by 17.7 per cent [sic] compared to 2007, contributing to what is expected to be the worst year since 1980 for the global automotive industry […]. Worldwide auto sales in 2008 are set to decrease by 6.3 per cent to 66.5 million, compared to 71 million in 2007. A further worldwide decline to 62.2 million, or a 6.5 percent decrease, is projected for 2009. (www.engineerlive.com/Design-Engineer
With the loss of end product demand in automotive, the broader IC sector and semiconductors in general are forecasted to be negatively affected and auto sales are not forecasted to rebound for five to six years, according to the iSuppli report (ibid.). However, the increase in demand for hybrid, electric and other types of “greener” cars could be an opportunity for growth not only due to an increase in the unit volume of chips, but also due to the need for new types of components to solve the various engineering challenges posed by these types of cars (www.automotivedesign-europe.com/210200403). The automotive sector represents roughly 7-8% of semiconductor revenues (Lehman Brothers notes that the increase in IC and sensor adoption in automobiles could increase to 6% semiconductor consumption for 2008 (Lehman Brothers, ibid., p.32)).
Industrial (including military and aerospace) has remained inline and is not presently showing weakness. Though analysts caution that with continued global economic volatility and recession looming, the ‘trickle down’ effect from the macro situation to the IC sector may be negative. However, medical electronics is showing significant demand growth for devices for patients in home settings as well as for imaging and larger clinic- and hospital-based devices (www.eetasia.com/ARTP_8800544107_480200.HTM). The industrial sector represents roughly 9-10% of semiconductor revenues (Lehman Brothers notes that this sector is increasing the number and variety of semiconductors used, resulting in a forecasted increase of roughly 8% of semiconductor consumption for 2008 (Lehman Brothers, ibid., p.32)).
Drilling back into ICs
IC design houses are also feeling the impact of the macro trends that we see trickling through the industry and the sector. Even before third quarter (3Q08) results were to be posted, many IC design houses (particularly those in the LCD driver IC market) began stating expectations for declines in sales growth. As a result of the slower demand, especially for LCD driver ICs, CAPEX has been cut as have the plans to convert capacity from memory to logic ICs, which many had already begun doing due to the ongoing memory market downdraft.
The downscaling of expectations was not as widespread as feared. Taiwan networking and media IC design houses in particular, grew during 3Q08, some companies seeing double-digit Quarter-on-Quarter (QoQ) results. Despite the surprising gains by some, macro economic factors have dramatically affected stock prices of many Taiwan IC design houses. “Taiwan IC design houses have seen their share prices drop on average about 50% this year, and some small companies are even down over 80%. Consolidation within the industry seems to be starting,” according to sources to DigiTimes on 7 October 2008. These forecasts are being borne out as November came to a close. Though with the caution that despite the downturn and need to protect profitability, companies must continue to innovate to compete going forward and be ready for a rebound as we near 2010 (www.eetimessupplynetwork.com/212100051?cid=NL_eetimessupplynetwork).
The reductions in some markets, such as panels, not only affected IC design houses, but also on back-end packaging and testing companies. Many of the major Taiwan IC packaging and testing companies are “expected to suffer a sequential decline of 5% on average in revenues in the fourth quarter due to weak demand from the PC, handset and display sectors,” according to company sources to DigiTimes on 18 September 2008. But with conservative order placement by IC makers, back-end companies have had “to cut prices in order to attract orders and improve their utilization rates,” according to sources to DigiTimes on 26 September 2008. The forecast for 4Q08 through 1Q09 is not improved, with “below normal seasonality […] on foundry utilization drop. Back-end foundry is driven by semiconductor unit volume growth.” (Morgan Stanley Research Taiwan IC Packaging & Testing, 18 September 2008, p.1).
Looking further ahead though, there are growth opportunities for Taiwan IC packaging and testing companies:
As semiconductor makers continue to shrink geometry, wafer growth will be slower than unit growth. As system in packaging (SIP) becomes a trend to meet faster time to market, backend [sic] foundry makers value-add will continue to trend up in semiconductors. (Morgan Stanley Research Taiwan IC Packaging & Testing 9 October 2008, p.1)
Tough challenges and ripening opportunities
On October 3, iSuppli cautioned that “DRAM suppliers face tougher challenges in servicing debts and financing capital expenditure as banks become more cash-strapped under the global credit crunch.” With inventory days on the rise, ASPs depressed, and a weak market, there is not much good news in sight for DRAM memory makers (The Washington Post, 03 October 2008, “DRAM Makers Face Tougher Challenges: iSuppli” (www.isuppli.com/New.aspx)) Alternatively, the primarily industrial sectors that continue to show growth even during the present economic climate are also revealing promising times ahead, particularly for 32/64-bit MCUs, embedded MPUs and DSPs (i.e., medical electronics, energy efficiency and conservation/alternative energy, chip cards and payment processing, communications infrastructure, and automotive electronics) (www.eetimes.eu/semi/211100080).
Any divide between the semiconductor industry and global macro economic forces is no longer. The impacts of the memory ASP collapse out-span the present global economic situation, but the changes to the entire electronics industry supply chain as well as its many sectors and markets are being propelled by macro economic variables. In this manner, macro effects and IC forecasts are interwoven:
Semiconductor components are not standalone entities – they make up the core building blocks of an electronic system. […] Therefore, the underlying growth rate of the semiconductor industry is fundamentally driven by the growth rates of key end-markets, as well as by the growth of semiconductor content that is incorporated into electronic systems. (Lehman Brother’s Global Semi Handbook 2008 2 June 2008, p. 33)