Open Market Views 2011-2012: Component round up and outlook


Close up photo of motherboardWhile 2011 may be a year that some along the semiconductor supply chain will be happy to close the book on, it was not without its bright spots, particularly for processor and sensor suppliers. 2012 will start with negative impact on the PC sector due to the after effects of Thailand's floods, but overall the forecast is for stability and rebound based on increased penetration in auto plus ultrabook and superphone successes.

2011 saw two major, devastating natural disasters: Japan's earthquake and tsunami in March and, most recently, Thailand's flooding.  Both of these unfortunate events led to global supply chain disruptions for extended periods (in the case of Thailand, we are still in the midst of the shutdown and disruptions). Adding to these critical situations is the ongoing tumult in the global macroeconomic scene that has tempered consumer confidence and encouraged frugality on the enterprise front.  These demand-soft situations have put inventory management in the limelight and market pricing has, for some key components, fluctuated more than is normal.  Soft end-product demand has meant a reduction in sales for a handful of sectors focused on consumer electronics, such as TVs, displays, PCs, and gaming, to various extents.  Meanwhile, demand for tablet PCs, e-readers, smartphones, and automotive infotainment continues to be quite strong and has bolstered the semiconductor and electronics industry overall.

The supply chain shutdowns from the disasters in Japan and Thailand have in some ways acted as a control on inventory, simply due to the lack of replenishment.  Most notably, these supply chain impacts have resulted in what will likely be a multi-quarter shortage for hard disk drives (HDD) and the components that comprise them.  However, inventory reductions due to shutdowns are not a healthy supply chain situation, and we are seeing many PC sector companies significantly impacted and unable to provide end-product, leading to price increases and lack of volume (hence revenue) for those companies.  According to this report by iSuppli, HDDs are and will be in short supply at least through the first quarter of 2012 (1Q12), if not the first half of the year (1H12), due to a reduction in HDD shipments estimated around 30% in 4Q11.  These shortage situations, particularly the present HDD shortage, are reverberating through the industry and dampening outlooks for related components and for PC end-products.

Drill-down into components

A key component for the industry, memory is also always among the most volatile.  Much of this year’s volatility is being driven by the current shutdown and disruption of the HDD supply chain and its negative effect on PC manufacturers (desktops and notebooks).  Expectations by analysts, such as those at Credit Suisse, are that "[…] because of the Thai floods, PC production will be 20-30% below plan in Dec-Feb." (Credit Suisse "Electronics components update (30 November 2011) Vol. 12," slide 1) 

Given this intertwined situation of HDD shortages leading to a stop in PC production, PC OEMs will be in ever-increasingly tight positions regarding margins (higher HDD pricing and reduced PC volume).  This translates into another variable affecting memory pricing, particularly for DRAM.  As PC OEMs face increases in drive costs, they are less likely to negotiate favorably for price increases for DRAM, especially while DRAM inventory is building because capacity continues but without end-product to move into. 

Another end-product situation affecting DRAM pricing is the continued decline in DRAM content in notebook PCs, expected to drop by a total of 0.6GB in 2012 and only increase slightly over the next few years. "The net result is that DRAM content in notebooks will amount to a projected 10.2GB per notebook by 2015, compared to prior forecasts that showed memory loading of 12.6GB for the [same] year," according to this research from ElectronicsFeed.  Adding to the deceleration in DRAM penetration is the rise in DRAM-light tablet PCs, ultrabooks, and the increasing move to cloud services.

In sum, DRAM has experienced another declining quarter due to multiple variables negatively affecting pricing and demand.  According to DRAMeXchange's 4Q11 analysis and outlook (purchase only), "due to weak economies worldwide and a severe oversupply situation, DDR3 4GB average contract price fell […] nearly 37%."  iSuppli extends this down forecast into 2012, citing, "DRAM, SRAM, NOR Flash memory —along with digital signal processors — will see revenue declines of 15 percent or more in 2011. The memory market will not see any relief in 2012, as all segments including NAND flash memory are projected to decline."  This softness in the wider memory market is expected to continue at least through the first quarter, perhaps even first half, of 2012.

The situation for NAND has been volatile as well.  Throughout November, NAND contract pricing declined due to oversupply situations, despite increased short-orders for SSDs which increased NAND demand, according to research from DRAMeXchange (purchase report here).  Gartner echoes this NAND market view in their industry report, citing sluggishness "[…] due to seasonality and an uncertain macroeconomic environment. Oversupply concerns remain for late 2011 and will spill into 1H12 as new capacity ramps up, although this will fuel a cautiously optimistic 2H12 demand outlook." (Available for purchase here)

Despite these sluggish pricing situations and concerns of increased supply, NAND is expected to see a pick-up in overall demand which will trigger pricing stabilization and increases, according to Barclays Capital, "U.S. IT Hardware: IT Hardware Margin Tracker – Oct 2011," 27 October 2011, pp. 10-15.  This demand pickup is seen as coming from the iPhone 4S demand and tablet PC and smartphone sales for consumers during the holiday period, as well as builds for the expected iPad3 in 1Q12, iPhone5 Summer 2012, and multiple ultrabooks throughout 2012.  The cautionary note to any price- and demand-rebound for NAND is whether or not capacity ramps from the new fabs at Micron, Samsung, and especially Toshiba will flood the NAND market and weaken any rebound (ibid., pp. 1, 10).

The ASP declines should not, necessarily, be seen as an overall negative variable for NAND, though.  With the price declines for NAND coupled with the shut down of the HDD supply chain due to the Thai floods, many analysts and SSD manufacturers are forecasting improved SSD penetration due to reduced costs, thanks to reductions in NAND flash pricing (see the interview with Kingston Technology by DigiTimes, 25 November 2011).  "Average pricing for 1GB of NAND flash memory will likely fall to US$1 - a threshold that will trigger a meaningful replacement of hard disk drives (HDDs) by SSDs - sometime in the third quarter of 2012," said Nathan Su, flash memory sales director of Kingston APAC.

Looking at growth, NAND flash revenue grew 5% and units were up 10%, but ASP was down almost 5%, for the recent three month moving average (3MMA) based on year-over-year values, according to SIA data here and here presented at the beginning of 4Q11 and analyzed by Credit Suisse in their report, "Semiconductors: October 2011 SIA Data," 4 December 2011, pp. 7, 16.  While these data are from early 4Q11, they are being echoed in the most recent revenue reports for November by the memory manufacturers.  As cited by DigiTimes (12 December 2011), "Most DRAM module makers have posted sequential revenue gains in November, buoyed by increased shipments of NAND flash products, according to data released by the companies."

This year has been equally challenging for panels; from LCD TVs to small OLED displays, the panels sector, like memory, has experienced challenges that are likely to lead to changes in 2012.  Again, the missing variable to success for the panel sector has been demand.  The same set of reasons runs throughout all semiconductor and electronics industry sectors this year: global and national economic uncertainty in the mature economies has pulled overall demand into weak territory.  As a result, panel inventories continued to rise this year, and demand from consumers and enterprises was not as strong as hoped.  With Microsoft's release of Windows 8 OS sometime in 2012, there is considerable hope for increases in enterprise spending, which has, at least, been better than consumers' during 2011 for traditional desktop and laptop PCs.  In Barclays Capital's recent report ("U.S. IT Hardware: IT Hardware Margin Tracker – Oct 2011," 27 October 2011, p. 4), all three panel sizes for the desktop and laptop displays (from 14" through 19" sizes) were down close to 1%, but year-over-year for 2011 by October showed similarly modest gains in the 0-2.4% range, a reflection of the continued but weak demand.

Small and medium displays were the bright spot, as one might guess, given the continued strong (okay, HOT) demand for tablets, e-readers, and smartphones.  With the new, cost-competitive, oxide material called IGZO (indium, gallium, and zinc) display slated for adoption by iPad3, we expect the next generation of higher-resolution displays to be at the feature forefront.  This demand for improved resolution displays could actually help existing LTPS' demand as a lower-cost high-resolution component and offset the competition from OLED penetration while IGZO builds (cf., Morgan Stanley, "Consumer Electronics: Asia Insight," 13 October 2011).  The small to medium displays are certainly sector drivers, but competition is tight and barriers to entry high for anyone not already in the space.  LG is the current leader, with economies of scale due to multiple large OEMs relying on LG's displays (see this recent report from iSuppli).

LCD TVs have had to contend with the sluggish demand from mature economies and have dragged overall sector numbers down.  Inventory build-ups were the on-going theme through 3Q11, but with some price incentives by retailers, consumer purchases did pick up and help ease a mounting situation.  As a result, production has decreased for the medium to large LCD TV sector, and orders were conservative in 3Q11, so if there is strong demand during the holiday season, some inventory tightness is likely, but it will come down to price sensitivities at the retail sale. Globally, "LCD TV shipments worldwide were about 1% better than forecasted, rising 12.9% Y/Y to 51.5M units compared to single-digit annual growth during Q1 and Q2'11.  This is a good indication of improving demand in end markets," according to this report from DisplaySearch.

CPUs have had a relatively good run this year due to a variety of factors. 
The main factor has been the shift to higher-margin, higher-priced products (see also Barclays Capital report "U.S. IT Hardware," 27 October 2011).  This shift is verified by some sourcing problems on select high-end, series processors for a variety of end-products for enterprise, servers, and, more recently, the build up for the array of ultrabooks that we expect to see premiered at CES.  Intel's new ultrabook CPU series is seen by many across the industry as an important catalyst that could boost the wider semiconductor and electronics supply chain.  The reasons are simple: demand in the traditional PC sector (excluding tablet PCs) has been waning.  With the introduction of many new ultrathin, ultralight (that is, 'Ultrabook'), and feature-rich notebook/laptop devices to compete with Apple's MacBook Air and the few existing ultrabooks from Asus, Acer and Samsung, there is expected to be both price competition and the draw of a new 'must have' PC with significant feature muscle behind it.

The expectation is that CES will be the showcase for roughly 50 new ultrabook-type devices on display and some with a 'ready-to-ship' status.  With the anticipated ultrabook demand, we expect to see increased tightness in 2012 for the leading edge, quad-core CPUs that power these devices (see here for quad-core tablet review from ComputerWorld).  Since builds have been more conservative due to the weaker demand for traditional PC devices, once demand begins to mount, pricing will also increase.  While Intel will see increased competition in 2012 from ARM and AMD, especially, Intel should see a boost with the release of 'Ivy Bridge' in 2Q12 (see here for ARM updates, and here for Intel and AMD updates from ComputerWorld). 

Noteworthy for CPUs this year, beyond the soon-to-be mainstream quad core architectures, is the continued move of CPUs to more of a System on a Chip (SoC) function.  Increased feature demands for reduced power consumption, latency, and increased speed and superior graphics has meant that processors have seen architectural changes.   Couple these demands with ever-shrinking form requirements to meet ultrathin, ultralight designs (from notebooks to tablet PCs and down to new 'superphones,' new models equipped with quad-core processors and other higher-end components than present smartphones), and we expect continued innovation and growth for the wider processor sector, and especially for newer integrated CPUs.

Thanks to the hot demand for tablet PCs, e-readers, and smartphones, along with forecasted demand for ultrabooks and superphones, increased automotive penetration, and expectations for increases in remote healthcare monitoring, microelectromechanical sensors (MEMS) continue their growth in the semiconductor and electronics industry.  The breadth and depth of penetration of MEMS has been phenomenal, and now with sensor fusion (a dedicated and integrated MCU for governing heavy load applications) on the horizon, MEMS holds the potential to improve centralized processing with fewer, ever lower-powered MCUs, as reported here by iSuppli.

According to the MEMS Industry Group (MIG) SensorMag here, "MEMS sensor industry as a whole […] experienc[ed] a compound annual growth rate (CAGR) of 10% in 2011 with an expected 10.5% CAGR to 2015, according to Jérémie Bouchaud of IHS iSuppli — with the bulk of that growth coming from MEMS pressure sensors, accelerometers, and gyroscopes."  The automotive sensor market alone continues to expand rapidly due to the importance of MEMS for both safety and auto infotainment.  As such, "The revenue for the automotive sensor market is expected to grow from $14.5 billion in 2011 to $20.70 billion in 2016, at a CAGR of 7.4% from 2011 to 2016," according to this article in SensorMag.

Forecasts for end-device demand show that MEMS is a critical component set which will increase penetration levels across markets, products, and sectors in the semiconductor supply chain.  This wide-scale and deep penetration adds to the healthy and continued demand for new products and, as these features continue to rise to the top of the list, the integration of sensors with core processors, power management systems, and ICs will also continue.

Looking forward

While 2011 may be a year that some along the semiconductor supply chain will be happy to close the book on, it was not without its bright spots, particularly for processor and sensor suppliers.  2012, overall, is forecasted to see some rebound and stabilization across the board.  The year will certainly start with negative impact on the PC sector due to the supply chain shutdowns and disruption caused by the devastating floods in Thailand.  As we move into 2H12, with ultrabooks well introduced by then and with new tablet PCs and superphones introduced, coupled with automotive industry pushes for their new vehicles to be equipped with increased infotainment features, there is renewed hope that 2012 might make up for the disappointments some saw in 2011. 

Meanwhile, smartphone penetration is forecasted to stabilize, meaning that those devices are or will have reached a watershed point and demand will taper off alongside pricing.  This could be a price point opportunity for the devices and the long list of components in the bill of materials (BOM), with price-sensitive consumers worldwide more likely to upgrade or switch to smartphones with lower pricing.  Additionally, the continued competition in the tablet PC arena is focused on cost as e-readers attempt to compete in that market for casual users.  These price pressures, while not generally favorable, could help push older inventory to new purchases for this class of devices while making room for the quad-core "ultra" and "super" models of PCs, tablet PCs, and phones for the high-end user (whether consumer or enterprise, as these combine more and more).

Regardless, the innovative architectures (2x- and 1x-nm will be coming out as well as the move to 450mm wafers), technologies, and end-products are in the pipeline and hold promise to entice a renewed demand cycle.

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