Why is the semiconductor seen as being fundamentally strong and how has the value chain contributed to these important fundamental strengths? Overall growth for 2011 continues to see revised forecasts. To understand these forecasts and why we are entering an accelerating growth curve, we offer an understanding of recent industry and sector dynamics.
Coming off of the positives from 2010 (Y10), and led by relatively optimistic forecasts during 1Q11, the remainder of this year has proven to be more volatile than anticipated. While there have been a few demand hot spots for devices, many sectors have reset their goals from the hopes of double-digit growth to simply 'stabilization' for 2011. Given the volatility of the macro-economic situation, a look at the semiconductor sector trends can offer insight into device demand situation and component trending. By understanding sector trends for the semiconductor value chain, we are afforded better views to where we are now and where we are likely headed as we move into 4Q11 and beyond.
To be certain, the declines in semi's 2011 forecasts can be directly related to the global macro-economic situation because of the close intertwining of these market forces. In the mature economies of the US and Europe, consumer and corporate confidence has yet to regain the historical demand levels necessary to propel strong growth. Instead, 2011 has so far been characterized as a 'pause' rather than a true slowdown of a recessionary type. However, the emerging economies of Brazil, Russia, India, and China (BRIC) along with Indonesia and South Korea, are continuing to show serious momentum for the semi and electronics markets. In addition to the few hot devices this year, it has been the emerging economies' growth and wide spread sector demand for electronics that has helped to off-set the negative impacts of US and European economic problems.
Semi sector forecasts
In the midst of all the global macro-economic woes, it seems like the semiconductor and electronics industry news ought to be rather grim as well. What has been curious (and thankful) about this year, is that while global macro-economic conditions are less than favorable due to the heavy weighting of mature economies' debt problems, the semiconductor industry itself is NOT experiencing the same, dramatic negative situation across all sectors. One interesting difference this year is that a small set of sectors are so strong, they are carrying the overall growth estimates for the semiconductor and electronics industry. Growth has been mostly centered around the value chain for smart wireless devices (SWDs), namely tablet PCs and smartphones, as well as for SSDs (see here for Gartner's latest 2011-2012 forecast revisions). This discord has left many scratching their heads and has added more fuel to the 'wait-and-see' approach among some companies, mimicking what consumers and many corporate purchasers are doing (see this explanation of semiconductor equipment market forecasts byDan Tracy, senior director, SEMI Industry Research & Statistics).
There are semiconductor industry forecasts for revenue/unit growth along with the possibility of some capacity/supply constraints which should help improve pricing along the value chain. Growth for 2011 is forecasted in the range of 3-7%, depending on the degree of conservatism by analysts (e.g., Barclays Capital forecasts +4% YoY revenue growth for Y11 ("US Semiconductors: July SIA Data […] 6 September 2011"); SIA forecasts here +5.4% growth for Y11; Gartner's recent downgrade here of revenue forecasts to -0.1%, but note that is for revenue not overall industry growth; EETimes reviews the analysts' forecasts for 2011 chip sales here).
Behind the (still modest) growth figures are the device demands that directly influence the component forecasts that actually drive our industry-wide growth numbers. The leading devices driving demand continue to be tablet PCs and smartphones. Consumer Electronics (e.g., handheld gaming, GPS stand-alones, etc.), TVs, traditional PCs (laptops and desktops) have seen softness and weakening demand since 1Q11 and so far the Back-to-School seasonal demand does not seem to show any real pick-up. However, with new Ultrabooks to be unveiled at Intel's Developers Forum and then released from September through 1Q12, there are renewed hopes that the PC sector (and the related components) will see new gains. Meanwhile, outside of tablet PCs and smartphones, most analysts are looking at Industrials, Communication and Automotive as the sectors that are likely to report "modest" improvements (in part based on expected forecasts from Texas Instruments 4Q11 guidance, as reported by Barclays Capital "Semiconductors and Equipment […]" 6 September 2011, pp. 1, 3).
Let us drill down into a selection of semiconductor and electronics sectors that are showing interesting patterns that affect component demand, and, in turn, drive wider growth (or pauses) across the semiconductor value chain.
Semi's Days of Inventory
Because of downgrades to Global and US gross domestic product (GDP) numbers during August, and softening consumer and corporate confidence levels, it has been very tricky to gauge demand looking into 4Q11 and beyond. As a result of demand softness, inventory drill-downs have really been the strategic focus of the semiconductor value chain and play an important part in understanding the following numbers, analyses and forecasts.
As of late August/early September, inventory across the semiconductor value chain was healthy with the efforts to control and maintain good days of inventory (DOI) at each sub-segment paying off. This is being managed, in part, by working through inventory during the back-to-school rather than new supply being added. DOI as an industry average was "at 41 days (unchanged in the quarter) [and] remains below the 5 & 10-year medians of 42 days," according to Citigroup Global Markets "Electronics Supply Chain Inventory Update" 25 August 2011, p. 3, 10. With continued depressed utilization and reduced inventory builds along the value chain, the forecast is for continued work through of inventory and healthy levels to be safeguarded. One caveat, should there be a bounce-back in demand during the holiday season of 4Q11, shortages along the value chain can arise, leading to parts delays and rising ASPs.
A result of these new (leaner) norms in inventory management along the entire value chain, and with more inventory being held at EMS and distributors ("hubs"), there is agreement that the semiconductor value chain is more efficient; another sign of the maturing nature of our industry. Analysts, such as Citigroup, as well as major chip companies, such as TSMC, point to 3Q11 as the inventory adjustment period and that following 3Q11, a return to normal utilization rates will likely return.
Semi sector trends
Looking again to gain a general understanding of how and where the semiconductor industry is performing, we have provided an overview of some of the sectors with the most movement impacting the industry, positively or negatively.
- Equipment: Semiconductor equipment and fab tools have seen a slowdown on a quarterly basis in response to demand softness of end-products, but the 2011 yearly forecast by SEMI continues to be strong in the face of sustained CAPEX plans. While down from the original 31% increase forecasted for 2011, the present expectation is still for a record year of US $41.1 billion, a 23% increase YoY (see here for the full SEMI release). 2012 is expected to see a modest decline YoY, but still likely to be the second highest level on record, according to the same SEMI report.
- Enterprise PC: Demand continued to build in 2Q11, pushing "corporate shipments [to] increase[…] 5% YoY versus flat growth for consumer[s]" (Citigroup, ibid., p. 15) With Intel's push of ultrabooks through their Developers Forum and the Sandy Bridge platform launch, continued good demand for enterprise PCs is expected. However, the impact of tablet PCs on corporate refresh cycles cannot be discounted. With the increased functionality of tablet PCs, and the demand for the devices by employees, corporations are interweaving tablet PC purchases with traditional PC refresh. While this drags down the traditional PC spending, the overall PC market (and components) are strong due to faster than anticipated adoption of tablets (cf. Barclays Capital CIO Survey September 2011, p. 7). The emerging markets of BRIC, and particularly China, are proving equally important for PC sector growth. For the first time ever, China overtook the US in PC sales representing 22% market share in 2Q11, according to Morgan Stanley's "PC Market Update" from 8 September 2011, p. 2 (see also this publically available article in PCWorld).
- Consumer PC: The greatest demand is squarely rooted in the tablet PC sub-sector. Traditional PCs (laptops, notebooks and desktops) have not fared as well among consumers who are more hesitant to refresh their hardware. On the other hand, consumers are still demanding tablet PCs at a booming rate, translating also into employees demanding corporate support for their tablets. With tablets increasing in functionality there is an increase in pressure on laptops, negatively affecting PC sales, according to Gartner's latest research here (see Gartner's report on India's PC growth of 2.5% YoY here and their report on European PC decline of 15.4% YoY here). Worldwide PC growth has been revised to a 3.8% increase YoY for 2011 but 10.9% YoY in 2012, according to this Gartner report. Offsetting this traditional PC demand drop is the continued rise of tablet PCs which are forecasted to reach 60 million units in 2011, a 245.9% increase YoY (roughly 70% of these units are expected to come from Apple), based on this research from iSuppli (see also this tablet sector review from PCWorld).
- Mobile: Along with the triple-digit increase of tablet PCs, is the continued strength of smartphone demand as 'smart becomes average.' The latest research on global smartphone shipment comes from DigiTimes (6 September 2011) and forecasts that 2011 will see 462 million units shipped, a 60% increase YoY. With Apple's iPhone 5 upcoming release, the momentum for smartphones is seen as continuing at a hot pace, including the competition around the OS gamut. The numbers speak for themselves: "Global smartphone shipments are set to soar to 1.03 billion units in 2015, up from 294 million in 2010. Meanwhile, media tablet shipments are expected to rise to 275.3 million units in 2015, up from 17.4 million in 2010," according to the latest research from iSuppli.
- General Sensors: Firmly supported by the astronomical rise in tablet PC and smartphone demand, microelectromechanical systems (MEMS) have continued their steady and steep growth during 2011. In fact, as a result of the consumer and mobile devices market for MEMS, the sensor market "is set to generate record growth in 2011 […] Revenue in 2011 for consumer and mobile MEMS will hit [US] $2.25 billion, up a best-ever expansion level of 37 percent" according to iSuppli's research here, here, and here. This growth rate translates to a five-year forecasted CAGR of 22.5%, based on the iSuppli research here.
The deep penetration rates for MEMS in today's SWDs have propelled growth in the MEMS sector. IHS iSuppli research here estimates 95%-96% penetration rate for accelerometers and compasses, respectively, in smartphones with increasing penetration rates in feature phones and some tablets now. This penetration rate increase moves MEMS to becoming (if not already being) a standard and necessary component to meet feature set demands.
- Motion Sensors: Based on the rapid growth of SWDs, "a total of 4 billion motion sensors will ship in smartphones and media tablets in 2015, up nearly fivefold from 864 million in 2010," according to this iSuppli research. The continued high demand for motion sensors by consumers, particularly for gaming and map rotation, are leading to more elaborate feature uses of motion sensors which will, in turn, increase the capabilities, adoption and penetration rates of this class of MEMS.
- Networking: Supporting the mobile workplace and connected mobile lifestyle today, the networking sector continues to show strength as well, with sales holding to original 2011 forecasts (a rarity this year). Cisco still leads the pack and while there are still CAPEX challenges for network to overcome, the increased demand across sectors and for cloud computing services means that the entire sector will continue to grow and see inventory stable and demand good. (see Citigroup's "Electronics Supply Chain Inventory Update" 25 August 2011, p.20)
- Server: Similarly servers are showing a softening while server virtualization is increasing. However, in 2012, Intel is expected to release Romley, though analysts such as Barclays Capital do not expect this to have the positive boost that Nehalem did for servers (see their report "Barclays Capital CIO Survey September 2011," p. 18). The slowing trend for servers is in line with expectations when we consider the increased adoption of cloud computing services and the hardware and infrastructure changes associated with this switch. Our companion article, "Semi's Triple Play for the Next Growth Wave: Cloud migration and hardware" in this MarketWatch Quarterly, presents a drill-down into the implications and opportunities for semi as a result of migration to the cloud environment.
- Storage: This is a positive and strong sector, remaining at the top of CIO's priority spending, according to the most recent Barclays Capital CIO survey: "45% of CIOs indicat[e] they expect to spend the same amount [on storage]. Further, 53% of CIOs indicated that they expect growth in 2011 vs 51% in our prior survey." (Barclays Capital, ibid., p. 20) As a result of this spending, Barclays forecasts a 10% YoY growth for the server sector in 2011 (ibid., p. 20).
- Automotive ICs: Although the automotive sector has also seen some sluggishness due to the same dampening in demand as in other markets, the forecast for automotive ICs is quite promising, and confirmed by Citigroup's recent Technology Conference September 6-8, 2011. The reason for the growth in automotive ICs is the continued increase in hybrid electric vehicles (HEV) and electric vehicles (EV). As this article from EETimes Europe Automotive underscores, 92% of chips used in HEVs and EVs are analog ICs. What this penetration of analog ICs means is that with the increase of HEV and EVs on the roads, the CAGR forecast is extremely strong, as reported in the article by EETimes Europe Automotive:
Between 2011 and 2018, the value of analog ICs for EVs and HEVs is expected to grow at a compound annual growth rate of 23 percent, well-above the projected CAGR of 7.2 percent for standard automotive analog and linear products, according to Strategy Analytics.
- Automotive Sensors: Automotive MEMS will see a slight slowdown compared to forecasts for 2011 as a result of the Japanese natural disasters this March. According to iSuppli here, 2011's YoY growth is less than average but is set to recover and continue a strong CAGR through 2015:
Global revenue this year for the automotive MEMS sensor market is projected to reach [US] $1.99 billion, up just 4 percent from [US] $1.91 billion in 2010. This compares to last year’s 28 percent expansion over 2009 revenue of [US] $1.49 billion. Automotive MEMS unit shipments in 2011 likewise are set for relatively tepid growth, up only 9 percent to 750.7 million units, compared to a 36 percent increase last year.
Supporting the forecasts for strong automotive MEMS CAGR through 2015 are the numerous safety mandates that continue to roll across global markets and come into effect. Coupling the forecasted recovery in vehicle production with the enactment and fulfillment of the next wave of safety mandates, namely tire-pressure monitoring systems (TPMS), electronic stability control (ESC), airbags and manifold air pressure, iSuppli's research provides rather conclusive data supporting the continued volume and revenue growth for companies along the auto MEMS value chain globally.
Market conditions and value chain implications
In order to come full-circle, let us pull back from the sectors and consider some of the models that financial and industry analysts have constructed for the semiconductor and electronics industry in general. Credit Suisse recently released an industry report comparing the macro-economic indicators for the semiconductor industry to their 'Global IP' measure ("a Credit Suisse derived measure of economic activity which is an aggregate measure of the industrial production in a given country weighted by country GDP measured at purchasing power parities." In Credit Suisse "Semiconductors: Fundamentally Better Than Last Cycle's Peak […]" from 07 Sept. 2011, p. 3). Credit Suisse uses their 'Global IP' measure because it very closely correlates to semiconductor revenues and units, based on 25 years of Global IP data resulting in 98 data comparison points. This Credit Suisse model is presently showing semiconductor industry revenue growth (on average) to be +1.6%. This level is understood as:
[…] below [the] seasonal implied revenue growth of +4.8% for 2011. […] Further, assuming [Credit Suisse] Macro projections for Global IP growth of +5.9% y/y in 2012 would imply semiconductor revenue growth of +8.3% y/y […]. (ibid., p. 5)
Granted, these are not the exciting growth numbers we had hoped to see for 2011 and 2012, but there is a stabilization within the industry that should not be overlooked. After all, positive growth in the present macro-environment is still positive growth (revenue and units). Looking at long-term patterns and how/where we presently fit, the general revenue growth of 5-7% that we have been experiencing is, according to the Credit Suisse models, picking up to move to the 9-11% range (ibid., p. 6). What this means is that as the semiconductor industry squarely moves into a mature phase, the fundamental "cyclical characteristics [of the industry …] is cycling around an underlying growth curve which is accelerating." (ibid., p. 6) This view of moving to a higher revenue growth range is based on multiple-year data and long-term trend monitoring by Credit Suisse. Of course, with these higher growth curves, come equally lower troughs/downturns; likely contributing to the muted situation we are in presently and why we should understand our situation as 'stabilizing' while we move more firmly into the next growth cycle.
Why is the semiconductor seen as being fundamentally strong and how has the value chain contributed to these important fundamental strengths? There are a few data points that help to understand the evaluation of the semiconductor industry as being fundamentally strong, in spite of being in a 'pause' position for what should be a cyclically stronger quarter. Among them is the fact that compared to previous down cycles/years, on a year-over-year (YoY) basis, revenue and gross margins across the semiconductor industry are actually up 9-10%, respectively.
Importantly, inventory levels are very healthy with upstream manufacturers and suppliers being very aware and pro-active of downstream demand-sparse conditions. The value chain has truly worked together to reduce inventory along the channel and keep the industry in a stronger position than we have been in other demand-sparse situations. Also, likely as a result of the very strong strategic decisions since the recent global recession, most companies along the semiconductor value chain are doing well in terms of cash flow and protecting their monetary resources. This, too, puts our industry in a strong position and squarely places us in a mature phase that is primed for accelerated growth in the long-term.
Moore's Law lends itself to helping us understand the industry's health. Moore's Law itself is not a contributing variable to how or why we are in a fundamentally strong position, but it does provide one explanation of why/how we came to be in this stronger state. The increase in production with decreasing costs while improving product (higher memory in size shrinks at falling ASPs) underpins the accelerating growth curve that the semiconductor is in today (Credit Suisse ibid., pp. 6-9). What all that means is that as we are able to produce more units with higher densities at lower costs, and in doing so we are directly contributing to the accelerating growth curve that pushes our industry's ability to increase revenue/units.
Presently, 300mm manufacturing forecasts are strong due to high utilization rates for mature equipment. Industry analysts such as iSuppli are forecasting "a compound annual growth rate (CAGR) of 12.8 percent" at this wafer size during the 2010-2015 period. The revenue gains coupled with increased utilization that does not require capital expenditures by using mature technologies and existing equipment is important to semiconductor unit pricing and revenue cycles, of course. Also, as utilization increases, pricing will improve as well due to supply constraints that are forecasted.
We are also already seeing the transition to 450mm and EUV becoming a hot industry topic (see this comment from Jonathan Davis, president, SEMI Global Semiconductor Business; and this SEMI Executive Summit Summary here). Add to this wafer size increase the shrink to 14nm on the strategic books for leaders such as TSMC and Intel (see this summary of 14nm move from ElectronicsWeekly). Take these two significant transitions together and yield capabilities are dramatically changed. This type of healthy, forward momentum within the semiconductor industry underscores the continued growth potential and is at the core of our strong fundamentals.
In sum, the situation is a bit complex presently, but not beyond understanding. What makes things somewhat complex is the different directions that sectors are being pulled because of the tumult in the global economic arena. What is important to understand is the fundamental maturation and process improvements that have been at play in the semiconductor industry are continuing to move forward. These strong fundamentals not only propel the semiconductor industry along positive and interesting research & development paths, but also help ensure our industry's competitive health (price, capability, size, etc.) and ability to provide devices that encourage continued demand. The penetration rates for semiconductors across sectors is strong and diversification into various markets is proving to be critical to maintaining agility and revenue alike during taxing economic conditions for mature economies and growth conditions for emerging economies.