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2H12 Orders Cautious but Semi Foundry Sales Surging as Economic Concerns Begin to Lift


As the gears shift for consumers from summer to back-to-school and the upcoming holiday seasons, there is a noticeable hedging along the semiconductor and electronics supply chain regarding inventory holdings and orders. While consumers as a whole regained spending confidence over the summer, market analysts are expecting retailers to be a bit recalcitrant on 2H12 orders, still leery of any new economic jitters, as Supply Chain Management Review reminds us. This caution persists despite the continued positive trends seen in the global macro-economic sphere; where this week the US' S&P reached a new post-recession high, as noted by Financial Times, further quieting EU concerns and opening the door for greater consumer and enterprise confidence in 2H12.

Book-to-Bill drops but still in range

Meanwhile, SEMI reported this week on the continued decline seen in the July 2012 Book-to-Bill ratio of 0.87 for North American semiconductor equipment, down from June's ratio of 0.93. Since March 2012, the ratio of bookings to billings has continued to decline, but only since June has the decline included reductions in worldwide booking values. According to SEMI, the July data reveal that orders have decreased month-over-month by just over 10% on a three month moving average (3MMA), now down to US $1.287 billion; on an annual basis, the decline is a more moderate 1.5% reduction in orders.

However, the below-parity ratio is also showing the first significant drop in worldwide billing with July's initial levels at US $1.476, representing a 3.9% decrease over June and an annual decrease of 2.9%, according to SEMI. These data do not pose concern according to SEMI, who offers that the values are within range for cyclical slowdowns:

"Bookings and billings for North American semiconductor equipment in July are close to values reported exactly one year ago," said Denny McGuirk, president and CEO of SEMI.  "Seasonal slowing of investment activity in the current cycle is reflected in reduced orders as the industry enters the second half of the year."

Supply chain push and pull

Based on these data alone, we might wonder whether there really is reason to believe positive indicators for semi are out there. Certainly, there are various manufacturing strategies that we see being leveraged to hedge the inventory bets, as discussed recently in Supply Chain Brain. Obviously, should consumer confidence pick up quickly, there will be supply problems due to the current lean inventory which is unlikely to change given the reduction in orders (bookings), coupled with what we know is a shrinking upstream supply chain for leading edge technology at the foundry level. TSMC has already been at full utilization and even unable to accept additional orders from Apple, as IC Insights reported this week in their most recent IC Research Bulletin. With supply constraints in place and little wiggle room for quick increases, the question of pricing and availability is on many supply chain analysts' minds.

There are distinct positives within the general conservative order atmosphere, particularly where competition continues to wane, such as among the foundries. Considering the IC Insights research, looking at year-over-year (YoY) sales for the leading foundries, all are seeing increases, with the overall range from 54% to 7% (save UMC who is an outlier with a 0% change in sales YoY). As IC Insights details, the top 12 foundries "represent 89% of the total foundry sales (IDM and pure-play) in 2012. […] With the barriers to entry (e.g., fab costs, access to leading edge technology, etc.) into the foundry business being so high and rising, IC Insights expects this "top 12" marketshare figure to steadily rise in the future."

The demand for increasingly feature rich electronics is not waning. As a result, regardless of the macro-economic situation, the semiconductor supply chain continues to grow in volume and sales. As IC Insights sums up the foundry situation: 

Overall, IC Insights believes that the leading-edge IC foundry business is going to be very competitive between the four major advanced technology suppliers—TSMC, GlobalFoundries, Samsung, and UMC. With the continued success of the fabless companies as well as the strong movement by many IDMs (Integrated Device Manufacturers like TI, Renesas, ST, etc.) to the fab-lite business model, IC Insights expects the IC foundries to witness very strong demand for their services over the next few years.

There do exist significant challenges, particularly as the supply chain continues to compress due to rising barriers to entry. In response, there are new opportunities arising from the resulting changes in requirements of supply chain partners and the expansion of services being offered.

Providing agility and broad supply chain insight while safeguarding quality continues to be the most in demand value services requested of supply chain partners. The challenge of aligning customized needs due to specific risk management and market position options is moving the semiconductor and electronics industry to rethink traditional roles and relationships to recognize new opportunities from new partners. How these new challenges and opportunies play out in 2H12 will be an important indicator of the point at which the semiconductor and electronics supply chain will move onto the next growth phase.

Lisa Ann Cairns, Ph.D.
Written on Tuesday, 21 August 2012 20:03 by Lisa Ann Cairns, Ph.D.

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