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Focusing on Supply Strategies: New industry dynamics and installed capacity levels


Will 2012 be the year we have capacity and supply situations that buffer margins and stabilize pricing?  It's quite likely, based on data from the most recent (and final!) Semiconductor International Capacity Statistics (SICAS) quarterly report for 4Q11 "on capacity and utilization of the total wafer start capacity of the integrated circuit manufacturing industry," published by SIA. These data reports have long been a helpful collection to gauge capacity/utilization trends, but unfortunately, due to the loss of TSMC/UMC's participation, SIA has decided to discontinue the reporting since the data gap is too great for accurate trending.

The import of the significantly reduced levels of total installed (wafer) capacity growth for that the data point to (+4% [year over year (y/y)] versus the 2004-08 average of +12%), but still that level is up on an annualized installed capacity comparison (+9.0% y/y versus the +12.0% average, but well above the 2010 +1.0%, signaling a healthy 2011 rebound and confidence), as analyzed by Credit Suisse in their report "SICAS Data 4Q11," 01 March 2012.  Despite the y/y annualized growth in installed capacity, CS notes that capital investment in capacity and increased utilization capability is conservative when taking into account the increased costs of advanced process nodes.

Supply is certainly being kept well in check based on these data.  Utilization is very conservative but with a buffer to allow for upticks (hovering in the 80% range giving room for increases as needed).

What is not covered by these data are the larger industry changes and questions around the potential for reductions in suppliers, let alone reduction in new capacity due to high investment demands at the leading-edge nodes.  There are pros and cons to the present wafer and IC capacity growth situation, namely that conservative utilization levels and lean supply will bolster pricing and hopefully help to stabilize ASPs from within the industry given the multitude of external macro variables that have made pricing and demand highly variable in over the past year.  However, in the event of significant demand and/or disruption to production, it would also not take much for the industry to face wide-spread, negative supply issues that can pull down entire market sectors, as happened with the HDD, ODD and PC sectors due to the Thailand flooding disaster.  Beyond these pros and cons are the resultant strategic shifts that are underway along the semiconductor and electronics industry supply chains.  The capacity and supplier situations, in the wake of the 2011 disruptions, have moved more large companies to diversify supplier bases and to increase their demands for supply chain services, particularly around inventory and cost management, from agile market experts (read about specific supply chain strategy trends weekly in this column and an in depth analysis in Smith's upcoming MarketWatch Quarterly due out to subscribers later this month (free subscription here)

Many questions remain, but the fundamental take-away is that the industry fundamentals, while very lean and conservative, are in a strong position when it comes to wafer and IC installed capacity growth.  Utilization is forecasted to improve during 2012, along with pricing and stability in the industry, conversely CAPEX trending is falling while the cost of adding new capacity continues to climb with each new process node.

To provide detailed analysis, the following is a drill down into the SICAS data as framed by market analysts at Credit Suisse in their latest report published 1 March 2012 (ibid, p.1, ff.):

  • "Sequential supply growth is likely to stay below 2.0% over the next several quarters implying annual capacity growth of +6.6% - well below the 2004-2008 average of +12.0%."
  • SICAS data "showed sequential capacity growth of 2.9% and utilization of 88.0%, down from 91.2%.  […] including TSMC/UMC, we est. that total installed capacity grew 2.4% q/q and 9.1% y/y in 4Q11 and is now in-line with 3Q08 peak levels."
  • "Note that this is the first time in 8 quarters that utilization has fallen below 90%, as structural suppy discipline has resulted in more modest annual capacity increases (+5.6% y/y from 2010-2012) relative to the 2004-2008 avg. of 12.0%."
  • "According to [CS] model, annualized installed capacity grew +9.0% y/y in 2011 – a significant uptick relative to the +1.0% growth in 2010 but still below the […] 12.0% [average]."
  • "Lower capex [sic] spend implies y/y installed capacity increases of just +6.6% - an est. that could prove conservative [due to higher costs of] advanced process nodes."
  • For 1Q12, CS models "utilization of 82.5%, a sequential decline […] to be driven by a combination of seasonal demand softness, semi companies reducing internal inventory and modest capacity additions (+0.9% q/q)."
  • "Post 1Q12, [CS] expect[s] utilization to steadily increase through year end as a seasonal pick up in demand, HDD/Thailand tailwinds and inventory restocking more than offset capacity growth."
  • CS models 2Q12 utilization at 89.3%; 3Q12 at 94.7%; and 4Q12 at 94.8%.

Lisa Ann Cairns, Ph.D.
Written on Friday, 02 March 2012 11:52 by Lisa Ann Cairns, Ph.D.

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