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Silver Linings: Sorting through the appearance of mixed messages

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It's really impossible NOT to talk about the macro economic situation these days.  While we keep looking within our industry at the cycle timings, component and product demands, as well as inventory and shipment numbers, it would be disingenuous to pretend like the serious uncertainties in the US and EU are not weighing on everyone, everywhere.

So, given this wide and deep economic uncertainty, we wonder, just how should we best be bracing for the impact of the sky falling on our heads (again)?  Yet, as we scan the news, certainly there are wobbles generally, and memory, well, memory is taking a beating (again) due to worries over inventory supplies, consumer demand, pricing agreements, new 12-inch NAND ramps, and DRAM content growth slows (see, for example, here on DRAM content concerns).

However, the numbers for the semiconductor industry, at the generalized level, seem to paint a slightly different picture than the macro economic one right now, and that makes for some head scratching.  Yes, the US stock markets are in a fall, US GDP is poor (for example, this video overview of US issues by CNN) and the EU looks like sovereign debt problems are about to get worse.  So, how is it that we in semi see growth and profits in our 1H11 and quarterly reports?  Granted, it's not as easy nor as rosy as this summary statement leads us to think; 2Q11 numbers are off from 1Q11, and we are expecting continued slowing for the remainder of 2011 (see this overview of SEMI and SIA data from EETimes).  Regardless, semi is still forecasted to be up roughly 5-6% CAGR for 2011.  So, what might be behind these seemingly mixed messages?

Perhaps the two most important silver linings for us in the semiconductor industry to remember right now are:

  1. penetration rate increases for semi across the board in end-products is a significant boost to the industry (content is up everywhere, from automotive to industrial and on to portable devices); and
  2. the US dollar's tank in exchange rates is a positive for tech and semi sector revenue reports, right now.

Let's quickly consider the US$ exchange rate issue.  According to the latest IC Insights report comparing 1H10 to 1H11, semiconductor sales have increased year-over-year (YoY) by 8%.  While the exact percentage rise may vary slightly across analyst groups, the fact that a notable increase has occurred is a relatively stable consensus across analysts and industry data (two examples are SEMI's latest Global Update – World report and the 2Q11 silicon wafer shipments data just out here, and expanded upon by ElectroIQ here).

Why do we see these rises in profits?  The primary reason is likely the exchange rate issue presently, as IC Insights' report spells out clearly:

"[...] 10 of the top 20 semiconductor suppliers received a "boost" in sales value in 1H11 when revenue figures expressed in their local currencies were converted into U.S. dollars. In fact, these 10 semiconductor suppliers, in total, would have registered a 4% decline in 1H11/1H10 sales instead of a 4% increase if their revenue figures were expressed in their local currencies. Moreover, the top 20 companies' total 1H11/1H10 sales growth rate of 8% would have been cut in half to 4% if 1H10 exchange rates were used instead of the current exchange rate figures."

The second silver lining that is perhaps 'saving' semiconductor news right now is the continued penetration wave that we have been in for a while now (see, for example, the latest SIA release which is upbeat on opportunities for semi).  Namely, the YoY increases in semiconductor content across the board in products from industrial, manufacturing, automotive, energy/utilities, enterprise and consumer products.  You name it and we are benefitting from product designs with increased semi content.

As a result of this ongoing semiconductor penetration wave, despite the macro economic fears for double-dip recession in the mature economies and global reverberations, the semiconductor industry is expected to see a roughly 5% growth rate for 2011, even after the almost halving of 2H11's forecasts to 6% due to these concerns. 

For now, we will have to take some solace in the differences between semi industry forecasts and global economic news.  Meanwhile, we at Smith's MarketWatch will continue to monitor and track volatility impacts on and to our industry as we continue wade through the mixed and worrisome economic messages out there.


Lisa Ann Cairns, Ph.D.
Written on Friday, 05 August 2011 11:41 by Lisa Ann Cairns, Ph.D.

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