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Amidst the Slumps and Downgrades, Is Semi Growth Possible? Yes, for some

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This weeks' close has not brought relief to calm the worries out there.  However, before running for the exits, as emotions during turbulent economic times leads some to do, it is imperative to stop and do a balanced, honest evaluation of the industry data.  Sometimes easier said than done when the headlines push us towards highlighting the string of negative news we've grown accustomed to.

 

The data I'm talking about today are two sets, both out yesterday (9/15/11): Gartners' downward revision of global semiconductor revenue for 2011 here and SEMI's low book-to-bill ratio for August 2011 for North American semiconductor equipment here.  Let's quickly look at these headlining stories around the industry presses and let's also stop and quickly look at the implications and wider industry view as well.

Gartner's previous 2011 forecast came out in 2Q11 and called for a moderately upbeat 5.1% increase year-over-year in revenue for the semiconductor industry.  However, they have now forecasted a negative 0.1% revenue year for semi.  According to the Gartner release here, this significant (-5%) reduction in forecast is being based of the combination of macro conditions (global economic softness, concerns for a US double-dip recession, and EU sovereign debt problems) with flat to down 3Q11 growth likely due to poor back-to-school sales leading to inventory concerns, manufacturing overcapacity and significant DRAM demand declines due to weakened traditional PC sales (-26.6% for 2011).  That's some pretty compelling negative data.  To make your Friday even more gloomy, Gartner also halved their forecast for semi revenue growth for 2012 to 4.6% from the original 8.6% "due to a worsening macroeconomic outlook."

So where's the upside for growth in all this?  Well, honestly, even within this bearish release from Gartner are the nods to those sectors in semi that ARE faring well: smartphones and tablet PCs.  Yet there are more sectors along the semi value chain that are doing well given the economic times: LEDs across a range of markets, SSDs, servers (for data center infrastructure to support tremendous cloud growth), automotive semis (MEMS and analog ICs in particular), panels (particularly small and medium sized – also the LED-family of panels are gaining here), and NAND flash.  Furthermore, days of inventory (DOI) in the semi value chain have been closely monitored and continue to show relatively health, according to most financial analysts.

Importantly, the resounding evaluation of the semiconductor industry, when looking beyond revenue but to overall growth (meaning including volume/unit and end-to-end value chain globally) shows that we have strong fundamentals in place that are, despite the macro environment, moving our industry towards the next growth acceleration phase.  Granted with increased growth comes increased troughs and so the picture gets a bit complicated again.  To get the full story on what is going on, we have compiled three drill-down articles exploring the industry's health check and two growth sectors positively impacting semi now and for the long-term; see Smith's MarketWatch Quarterly coming out next week to subscribers (go here for a free subscription).

SEMI's forecast is also to be expected given the general wait-and-see approach we've been monitoring and discussing throughout the past few weeks in this MarketWatch Commentary section SEMI's 9/15/11 report shows the three month moving average for the August 2011 book-to-bill ratio has dropped to 0.80 (meaning US "$80 worth of orders received for every $100 of product billed for the month").  This is the lowest ratio since June 2010, which is not good news, of course.

The book-to-bill ratios have been on a steady decline since April 2011, and the reasons are much the same as outlined above for the Gartner revisions.  Caution prevails during economic uncertainty.  With demand-sparse conditions due to uncertainty (save critical and VERY hot devices plus emerging economies' demand), inventory controls are high and that means a reduction in equipment purchases that would otherwise be used to increase manufacturing capacity.

This situation of reduced equipment purchases and lessened capacity, while not good for the book-to-bill numbers is actually one of the strong, mature industry points that financial analysts are praising the semiconductor industry for presently.  While creating a downdraft along the semiconductor equipment sector, the conservative manufacturing position is positive to control industry and maintain healthy levels given the macro situation.  Furthermore, with upcoming transitions, many analysts are looking to the positive upside of reduced capacity through lack of equipment upgrades as leading to ASP rises once production is continued.  And production WILL regain momentum, the only question is will it be 1Q12 or later in 2012?

The important take-away is twofold: (1) Yes, we are (again) in difficult macroeconomic waters and that does have a direct impact on the semiconductor revenue stream due to demand-sparse conditions.  (2) There are strong fundamentals at play in the semiconductor industry as well as significant growth sectors that are positively propelling much of the industry forward in spite of the macro conditions.  Too lose sight of the full picture is not to search for rose colored glasses, but to be strategic in understanding where demand is and where it is going, because it is out there.


Lisa Ann Cairns, Ph.D.
Written on Friday, 16 September 2011 09:12 by Lisa Ann Cairns, Ph.D.

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