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Sector Brief: Analog's changing marketplace
Understanding a few critical end-market variables, coupled with some analog dynamics provides insight into the upcoming changes in the analog marketplace; changes that echo a similar watershed in automotive semis, just a few years ago.
According to Barclays Capital "analog ICs represented approximately 14% of the total semiconductor market in 2009." (Semiconductor Handbook 2010, p.162) Over the past year, analog was among the first sectors to recover, outpacing semi’s single-digit growth. But, as with other semi sectors, the second half of 2010 (2H10) forecast predicts more normalized growth and the possibility of a typical trough after having four to six robust quarters. Moving ahead to 2011, the cycles moderate to more normal trends, resting in the 7% growth range and continued ASP declines of -4% (data from Barclays Capital, ibid. p.162). But these numbers don't represent the full story behind analog.
Despite these staid forecasts, analog, along with a few other key component sectors, are in the midst of severe shortages with 20-30 week lead times on the back end that are surpassing historical levels, as underscored by iSuppli here. The result of these shortages, not set to diminish during 2010, are rising ASPs and continued lead time extensions. This situation along with expanding opportunities for analog solutions to meet today's end-product demands, is inviting competition that will shake up the existing small circle of companies in analog.
A brief overview of the analog market
Presently, a few major companies dominate their respective analog markets, alongside second-tier companies coming in occasionally to move market shares around for a while, but generally with little long-term success. The internal dynamics of analog from a market and a component perspective explain why this older market model persists in analog, from a market and a component perspective. The reason is, both are set to change.
The static market is, in part, due to the split in the analog marketplace:
- Application specific standard products (ASSPs), roughly 60% of the analog market, have highly specific requirements for specific products or end-markets, have shorter life cycles, and may have multiple supplier options, resulting in lower margins from price competition.
- High volume analog (HVA), standard linear analog ICs (roughly 40% of the analog market), are high performance and highly specific with diverse requirements; meaning that pricing is relatively stable due to high costs of switching and the high barriers to entry limiting competition, resulting also in higher margins.
The two broad categories of analog are subdivided differently based on the related market weights. Namely, the standard linear products market (valued at roughly US $13 billion in 2009) is dominated by voltage regulators (51%), then data converters (18%), amplifiers (17%), and interface (14%), according to Barclays Capital (ibid, p.164, ff.). The ASSP analog IC market (valued at roughly US $19 billion) is subdivided by application or end-market and dominated by communications (networking, telecom (wired and wireless) and handsets) with 47% market share, followed by automotive (17%), computing (14%), consumer electronics (13%), and industrial and other (9%), according to Barclays Capital (ibid, p.167, ff.).
The breakdown of analog provides a window into the changes happening within subsectors and hints at some quietly shifting dynamics of this important semiconductor sector. The different uses of HVA and ASSP also reveal the multiple ways changes in the broader, macro environment, impact analog. As component changes occur, analog will be affected; as end-market changes occur, these too will affect the market landscape within analog. Put these changes together and you end up with enough momentum and opportunity to overcome the challenge of analog's high barriers to entry.
Analog's market dynamic outlook
Inventory has been an important factor throughout the past two years and continues to be closely watched. The analog supply chain, as in the wider semi supply chain, managed inventory extremely well during the recession. This careful management supported the strong rebound seen thus far -- 22% revenue growth year-over-year (YoY). Days of inventory (DOI) continue to remain at healthy levels, slightly low, for the sector at both suppliers and distributors (96 DOI during 4Q09 for suppliers and 36 DOI during 4Q09 for distributors). Combining the numbers, we arrive at an overall historical low for the analog sector at 82 days (cf. Barclays Capital Analog Semiconductor Guide, p. 26; and Barclays Capital Semiconductors Inventory Update 5/20/10, p. 13). This historically low level is a critical variable.
With a return to normal, moderated growth forecast across the semiconductor industry, analog's healthy inventory levels will ensure a continued soft landing and clear return to seasonal patterns. Looking ahead to 2011 and 2012, analog is forecast to see 7+% CAGR levels. However, the impact of the present component shortages highlights some of the opportunities in analog today. Without any easing in sight from the historically high lead times, analog revenues will be good during 2010. ASPs continue to rise in response to shorts, with the impact on the wider supply chain being a notable opportunity for new competition due to increased ROI coupled with the long-term stability. This market situation points to a healthy diversification opportunity for companies.
Importantly, other external variables are at play in the analog product and application end-markets. There are significant opportunities for expansion as new devices and end-markets demand solutions that include significant analog solutions (esp. in medical, communications, automotive and energy efficiency and green energy). On the supply side, there will be some market impact (during 2011) from the 300mm fab for HVA coming online by Texas Instruments (TI) (from the Qimonda purchase in 2009) and talk of CAPEX from STMicroelectronics updating their fab in Grenoble, France.
New opportunities and challenges impacting analog
The analog sector, while having been characterized as maturing, is also on the verge of significant changes, based on current supply and demand. As mentioned above, analog has not seen the type of competitive dynamics as digital because of the high barriers to entry. Now, as demand continues to heat up and diversifies across segments and applications simultaneously, and shortages increase in duration and further tighten the marketplace while increasing ASPs and revenue opportunities, new competitors can only be expected.
First, we consider a couple of the major supply and demand variables, followed by a couple of the end-markets driving for solutions involving analog.
Two important supply developments:
1. 300mm wafer fabs
Perhaps the most concrete change facing analog is TI's 300mm HVA wafer fab, set to impact both HVA and ASSPs. "This facility will help improve productivity, or drive down the cost of analogs functions, by as much as 30%." (Barclays Capital Analog Semiconductor Guide, p. 10) In the price competitive, high volume, analog sector, this supply addition will help TI's market position. However, because of the compartmentalized, aka 'fragmented', nature of analog, the price competitive impact will be spread across product sectors and competitors.
Critical to today's tight market supply conditions for standard linear analog ICs, volume production is not expected to come online until 2011. The ASSP impact is seen as longer term because products must be re-qualified with TI's customers. Going forward, this new fab should put TI in an even better competitive position for ASSP contracts, especially for computing, handset, consumer and medical.
Not to be excluded from the 300mm wave, STMicroelectronics has been rumored to be considering updating its Crolles-2 wafer fab near Grenoble, France, as reported by EETimes here and based on comments from CEO Carlo Bozotti. However, a firm commitment to this expansion has yet to come.
2. Korea to build up analog
Also in the realm of new analog production and solutions is the April announcement by the South Korean government to invest 60 billion won (US$54 million) through 2015 to its analog chip industry, as reported here by Telecoms Korea. According to the announcement, "in the analog chip field, research and development will be centered on making motor drive ICs, LED operating chips, mobile audio semiconductors, and power management devices." (also from the Telecoms Korea article)
97% of analog demand in South Korea is met by imports from the US, Europe and Japan, as reported by Telecoms Korea. The addition of South Korea to the competitive landscape will have an impact on the analog marketplace, how dramatic is a wait and see event.
Two critical demand challenges:
1. Analog IC shortages
Analog's historically low DOI, down to 82 days (with lows for both HVA and ASSP), historically high lead times, 20-30 weeks, and continued rising demand from multiple end-markets are critical. While general market forecasts are showing a return to more normal, moderated growth, the situation for analog is a boom. As iSuppli summarizes, this market "imbalance [is] expected to persist until the end of 2010, but lead times will continue to extend and ASPs will keep rising, iSuppli believes." (cf. iSuppli's recent market update here).
The analog chip shortages have been so pronounced that some reports show that "[analog] vendors must turn away business, because they cannot meet strong customer demand." (cf. this EETimes article) While good for pricing, the supply problems are more worrisome than the revenue advantages, and this growing end-market plus diverse component demand equals increased competition in analog. One important example of a new (or rather, re-newed) competitor is the (re-)introduction of Samsung into the power management IC domain, the supplier for the Apple iPad power management IC solution (cf. DigiTimes 5/20/2010).
2. Power management demand
Power management IC revenue and demand has been growing rapidly leading to improved CAGR, ASPs, and resulting in shortages (cf. EETimes 6/21/10 summary here with Gartner's subsegment forecasts). With this demand, "the Power IC landscape is rapidly evolving. New technologies are in development, new competitors are entering the market, and new market segments and applications are opening up – often with unique requirements," according to the Petrov Group (cf. DigiTimes 5/24/2010).
Beyond ICs, the power management semiconductor sector has experienced severe shortages throughout 1H10 due to stronger, unexpected demand during an historically slow seasonal period. This surprise in demand has contributed to the supplier shortages and rising ASPs (cf. iSuppli market brief here). As iSuppli summarizes here, "inventory levels at [power management semiconductor] distributors decreased by 1.5 days in the forth quarter of 2009 amid strong sales – a development that induced even more demand, especially for the analog and discrete components of the market that already were in a state of shortage." The result is significant delays on the back end, particularly for analog suppliers.
Power management is a key sub-segment in analog that is independently forecasted to see increased demand. Specifically, improved power capabilities are in high demand, because end-products need to meet both consumer demands for 'always on' and meet energy star and similar criteria for the environmental 'green' labeling standards, particularly for consumer electronics and appliances (e.g., MOSFET controller efficiency gains as reported on by EETimes here; and wireless charging set to expand by a factor of 70 as reported by iSuppli here).
Obviously, power management is now a strategic feature in end-products. As a result, shortages are unlikely to ease and increased opportunities are ripe for new engineering and architectural solutions (necessarily involving analog). As recently offered by Dave Bell, president and CEO of Intersil, in this EETimes Design, "[a] third market driver is power, specifically, the need for new power IC technology that enables reduced power consumption in virtually any application. […]Every application, from notebooks and handhelds to data centers and smart grid designs, needs smarter power management."
End-markets to pull analog growth
Based on the above supply and demand variables, the addition of dynamic end-markets driving solutions requiring analog improvements and innovations are the final watershed moment for new opportunities and competitors into analog. So, what are some of these compelling end-markets set to pull–through analog solutions? Below, we briefly consider the four leading end-markets driving analog: medical, automotive, communications, and 'green' energy solutions.
Medical
Medical semiconductor revenue is poised to hit just over US$3 billion this year, according to Databeans as reported in EETimes News & Analysis here. With a 9% CAGR forecasted over the next five years, medical electronics is an attractive market segment (cf. also this companion article in this issue of MarketWatch Qaurterly). Medical electronics increases the demand for power management, sensors and communication capabilities, further promoting competition and new demand for analog.
Automotive
Automotive is reaching a stabilizing point, after a nice resumption in demand thanks to stimulus measures. Going forward, we expect continued growth, at normalized levels, because of innovations in safety and fuel efficiency, meaning that auto is still an important end-market for analog. In any given vehicle though, the number of analog components is increasing, just as the number of sensors (MEMS).
The hybrid- and electric vehicle sub-segment is an important locus of this growth, as each vehicle includes a dramatic increase in the number of semiconductors, especially analog and MEMS. Also supporting the increase in chip content per vehicle are the continued government mandates for safety and fuel efficiency, the next round to come in 2012 for the US and 2014 for EU (cf. ElectronicsWeekly here, and this earlier report by MarketWatch Quarterly here and summary in MarketWatch Commentary here).
Communication
Networking, communication and handsets are the market targets of all major analog companies "for revenue growth and margin improvements." (cf. UBS Investment Research, US Semiconductors 6/8/2010, p.66).
With mobile phone growth continuing to outpace forecasts, the opportunities for strong analog unit sales will continue as well. In addition to unit volume, are the increased feature demands providing competitive differentiations and market share opportunities for solution providers. Power management comes back into play here, as in so many other end-markets, with users demanding longer battery life with smaller board space in which to house batteries. That puts many solutions solidly in an analog and analog-mixed arena.
Green energy solutions
Energy efficient electronic devices, smart grid and smart meters, as well as energy efficient LED lighting are also key growth end-markets, each with solutions solidly based in analog (cf. this article in MarketWatch Quarterly for more on 'smart' solutions for semis).
Solar installations are growing worldwide, and likely to continue in the low teens for the next few years. With these installations come the ancillary equipment, all containing analog chip solutions. Analog becomes a dominant component when we couple this growth with the even stronger growth in smart metering and smart grid solutions, both requiring numerous analog functions (e.g., networking, wired and wireless communications) with the added adoption of LED lighting and increased adoption of energy star electronics and appliances. Presently, there is a strong, green market pulling analog along with it into serious growth numbers.
Analog's healthy green future
New platforms and technologies coupled with SoC and analog/mixed-signal integrations will be the next pull-through that moves analog into an exciting and more competitive market. Importantly, behind this market dynamic is the growth and new opportunities for both devices and applications that have been the cornerstone of HVA and ASSP analog to date.
The impending market change for analog is supported by the demands for medical, energy solutions and LED lighting, in addition to the continued strength of consumer demand for electronics, especially smartphones, notebooks and tablets. In light of the many end-markets and component demands, the present analog shortages are no longer shocking. These end-markets are vast, rich in consumers and devices, and are on the rise. With significant shortages and a lower number of competitors in the sector, compared to the broader semi market, analog is poised to undergo significant changes to technologies, competitive landscapes, and increased integration into chip-based solutions.
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