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Whither or Wither the Demand? Cloudy forecasts rolling in as economies stumble


The global and macro economic news is just not providing the boosts industries needed to move from the last growth period to the next.  In fact, the recent stalls in addressing (or redressing) the US debt crisis coupled with the debt problems in Italy and Greece in the EU are truly dampening global economic recovery and stability (cf. this article from Bloomberg regarding global market impacts of these significant debt issues).

With the semiconductor industry already having seen a trimming in forecasts for 2011, the latest revisions are bracing for "mediocre" sales as a result of the rumblings over recessions should the recent major crises linger or not be stabilized (see for example this recent MarketWatch Commentary; here and here for the latest MarketWatch Quarterly articles on where semi growth opportunities can be found; here, here and here from EETimes; and here for a good piece on global economic problems and semiconductor markets from ComputerWorld).

While a slight pull-back due to a return to more normal trending had been expected for 2011, the important demand driver of purchasing confidence that was necessary for sustained growth had been seen as a relatively reliable variable by analysts, at least for the hallmark and hottest devices (that is, PCs and smart wireless devices, respectively).  This is no longer the case given the present debt crisis climate on the heels of poor job growth data from the US last week (see here for an update on US employment, and this noteworthy article on economic data and consumer spending from Bloomberg).

With global economic situations becoming more unstable, particularly in light of the impact that a US default would have on the global economic situation, confidence is hard to come by across the entire semiconductor supply chain and across all potential device purchasers.  Simply put, the 'wait-and-see' approach is taking over, as we've discussed in the past few posts in MarketWatch Commentary, such as this post from earlier this week.

The result is that whether looking at data for semiconductor equipment tools or down through the chain to the sale of the hottest tablet PCs, orders are slowing as corporations and consumers become even more hesitant.  What are they waiting for?  There needs to be a resolution to the present macro economic uncertainties for consumers and corporations to spend.  As Peter Wennick, CFO of ASML Holding NV, Europe's largest semiconductor equipment maker, commented on their website, "concern the global economy will slow 'creates uncertainty, which currently reflects the hesitance of our customers,'" as reported by Bloomberg here

This uncertainty is the norm and is already moving some industry analysts, such as Future Horizons, to downgrade the semi industry growth forecasts.  As Electronics Weekly reported here this morning, Future Horizons has revised their outlook due to uncertainty and lack of visibility in semi: "A flattish Q1 and Q2 is expected to be followed by 4% growth in Q3 and 1.5% growth in Q4."

Chip inventories have been rising (see here from MarketWatch and here from iSuppli) but at least not to levels that pose significant risk at this point.  Certainly the memory sector has been more volatile lately (see here from MarketWatch) and with a potential glut of tablet PCs on the market, other sectors may begin to feel some of this volatility spreading.  That sense of volatility will likely translate into additional constraints on spending and more conservative and downgraded outlooks by many.

At this point, most analysts are pushing caution while the US debates how to avert or simply handle the impeding debt default situation, but there is still hope that a resolution will come.  With a resolution to the US and EU crises, we can hope that the back-to-school and historically more robust second half of 2011 may pick up where 2010 and 1Q11 left off.

There is strong reason to believe that once over the present situation, semiconductor robustness will return, as 2Q11 revenue for semiconductor equipment and chip manufacturers while muted, are healthy overall.  Generalized forecasts for 3Q11 and the following quarters are still positive and expectations of profit continue – the question is whether that profit will be modest or good (see for example this recent release from SIA) and whether that positive forecast will get pushed forward a quarter or two to 4Q11 or 1Q12. 

Right now, and until the immediate US and EU situations are resolved, it seems we've all been put into the wait-and-see mode.  At least we're walking into the present economic situation with reasonably healthy inventory levels for the industry as a whole.  The bright spot is that the emerging economies, long proven to be decoupled, continue to offer opportunities for semi (see this new MarketWatch Quarterly article just released to the public).

Lisa Ann Cairns, Ph.D.
Written on Friday, 15 July 2011 07:40 by Lisa Ann Cairns, Ph.D.

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