It's the third quarter and seasonal demand has been more guarded than we would have wished. Inventory has been held more in check as was seen early on through CAPEX pull-backs that kept production lower alongside of cautious manufacturers. For the 2Q12 period, inventory grew slightly, increasingly only around the 1% range, according to recent research by Credit Suisse ("Semiconductors: 2Q12 Inventory Analysis," August 6, 2012, p.1).
Comparing the various data sets we now have, as we exit August, proactive inventory management has been the saving, critical lesson learned for semi. We have seen this all along the supply chain from downstream and the trickling up to utilization and production that has played important roles in keeping numbers in line with seasonal levels. Most recently, SEMI's data from the three month moving average (3MMA) book-to-bill for equipment underscores this inventory conservatism across the semiconductor and electronics industry, as we synthesized last week. Orders were down, and there is little sparing of semi sectors, as we know from the situation for both DRAM and NAND currently, which are experiencing ASP lows and "stagnating demand," as EETimes-Asia recently discussed.
Seasonality and cyclicity
Among some analysts there is discussion around seasonality versus cyclicity, when trying to understand the present market and forecast outwards. Among these discussions is the research from Credit Suisse, as mentioned above, which points out that we really are seeing a number of mixed signals presently.
Recently, we saw revenue downgrades of 0.1% for the global semiconductor market for the 2012 year, by industry analyst IHS iSuppli. Of course we can quickly point to the dragging sector, PCs and notebooks (NB), as the main laggart, especially affecting DRAM presently (see the EETimes-Asia article, and the latest from DRAMeXchange). Then there are the questions of the next cycle in the smartphone and tablet PC sector, plus questions around how long those upward trends and volume demands can hold momentum. Although, coming less than a month before the release of Apple's expected next iPhone, demand for the leading devices is unlikely to abate, but wider market penetration is getting closer to saturation points expected in the next few years.
While traditionally we have expected third quarter rises, perhaps we are reaching a point where supply chain changes, challenging economic situations, and greater reliance on consumer over business sales is coming to the fore and affecting the wider supply chain functionality. There have been significant supply chain changes, both in the number of companies, the responsibilities and relationships along the supply chain, the costs and barriers to entry, and the increasing differences in the relative market and supply chain power held by Tier 1 versus other companies.
The semiconductor industry has long been a locus of positive disruptive change, and as we have matured, the lessons learned about supply chain agility are leveraged with the now inherent dynamic nature of production, distribution, and logistics to quickly provide ever-more feature rich end-products on a just-in-time (JIT) basis. We are seeing that companies are looking differently at supply chain partners and some of the long-held roles are changing, which holds promise for our industry's continued growth in the face of the macro situation.
The supply chain, today and tomorrow
What then to make of the present situation? Is it all about the macro economy again, or better, still? In many ways, unfortunately, yes, but in important ways, the current situation may herald the next maturation phase of our industry. As Credit Suisse questions, "[are we] seeing a structural change not in a cyclical trend?" (ibid, p. 2, ff.) Inventory has been shifting upstream to hubs, away from the downstream players, so that inventory management and efficiencies are value added services that the supply chain is providing without "reward," as Credit Suisse identifies, while revenue is moving downstream (ibid., p.7, ff.).
With this supply chain inventory and revenue redistribution of weight, it should be easier to understand that the reduction in iSuppli's forecasts is a complicated set of changes in the semiconductor supply chain as well as the tough macroeconomic situation that is suppressing demand for many semi sectors. But, what does that mean for the rest of 2012 and looking forward to next year? The forecasts for 4Q12 remain tentative because of demand questions, but geater agility and dynamic market responses alongside of risk mitigation strategies hold important positives for new growth in 2013-14.
The new types of supply chain relationships and the new requirements placed on experienced and sophisticated suppliers are proving essential in the latest market strategies. While seasonality continues to move below average, there are expectations that moving into 4Q12, there could be some gains with both Apple's product announcements and Microsoft's Win8 launch, as well as many other OEM product announcements that are anticipated. More importantly though are the longer term partnerships being forged as new efficiencies and dynamic market positions are set to create new opportunities out of existing challenges.