Written by Lisa Ann Cairns, Ph.D.
The looming question is whether or not we have (finally) completed the 2012 bottoming-out cycle; and at what point realistic rebounding and growth can be forecasted. Based on a wide industry data synthesis, consensus from financial and industry analysts point to a staggered move toward this desired point starting in 2Q13. Of importance in 2013 is the possible supply tightening and pricing fluctuations seen in the market data.
The 2013 forecasts are based on data informing the present market situation and foreseen movement along the three mentioned variables (future movement is based on semi equipment investment, CAPEX, and statements from fabs, foundries, and manufacturers along the supply chain).
Of importance in 2013 is the possible supply tightening and pricing fluctuations seen in the market data. The data pertaining to the supply chain movement has a direct and critical effect on part availability and sourcing because of the resultant supply reductions (due to inventory and warehousing concerns), reduced lead-times (adding supply constraint variables during demand spikes), and the ongoing supplier consolidations (notably along the EMS supply chain) that are compounding the effects on supply and pricing.
The most influential variable for the past year, and likely to continue into 2013, is the uncertainty in the global macroeconomic situation. While some stability will be regained in 1Q13, with various national elections completed, and once the US "Fiscal Cliff" question is resolved, there are continuing issues around the European Union's (EU) economic situation as well as the degree to which Emerging Markets (EMs) will continue controlled growth in the 5-9% range – reduced by internal economic measures in order to offset inflation and other concerns. Each of these macro issues have directly affected both consumer and corporate spending patterns in the semiconductor and electronics industry throughout 2012, having resulted in various investment and manufacturing pull-backs (product purchases, capacity and utilization levels, CAPEX, and equipment spends). 2013 will be dogged by the same factors and any forecast must include the caveat of overall hesitancy rooted in ongoing fiscal conservatism post the 2008 global recession.
Global and regional GDP outlook
Global GDP for 2012 is expected to come in close to 2.6%, only 0.1% higher than the global recession level. Normal global GDP growth is understood to be 3.5% range, as recently summarized by IC Insights. Generally speaking, 2013 is forecasted in the conservative growth range across analysts. Global GDP growth is forecasted between 3-3.2% for 2013; supporting growth year-over-year (Y/Y) but still conservative. The US GDP growth is expected to range between 1.5%-2%, EU to show no GDP growth, 0%, Japan to follow EU, and China expected to see GDP growth around 8%.
Overall semi industry situation
Presently, the data are pointing to 4Q12 looking to be the bottoming point for most semi sectors (except for the hot device sectors of tablets and smartphones and their supporting component manufacturers (CMs) and related supply chain). The correlation between foundry data, inventory, and demand support the 4Q12 through possibly 1Q13 as the bottoming point with recovery, likely muted, returning in or by 2Q13. Strong inventory management across the semi supply chain is much to credit for the positive results, and final inventory normalization should happen by the end of 1Q13 due to the support of holiday demand – again supporting a slight bounce back for overall semi growth in 2Q13 and forward.
The 2012 global semiconductor market forecast is showing a general consensus of a decline in the range of -2% to -3% Y/Y, though final holiday numbers in 4Q12 may lessen the decline. Analysts are expecting global semi chip sales to range from US $292 billion to $303 billion. Market rebound is generally expected for semi during 1H13, and to come into range with industry 5-year and 10-year compound annual growth rates (CAGR). The general consensus for growth return in 2013 is pegged in the 4-5% Y/Y range, which is down from the early 1H12 forecast for 2013 in the 7% range. 2014 forward outlooks are slightly better than 2014, reaching into the low 5% Y/Y growth range. (see also the 10 Dec. 2012 Smith MarketWatch Commentary for more details).
On a separate note, semi equipment rebound is not forecasted until 2014 due to conservative investments and the industry coming out of a recent expansion period, most notably in 2010-2011. 2012 semi equipment is forecasted to be down -6% Y/Y followed by a slight increase to -2% Y/Y in 2013. This is in line with cyclical expectations and should not be seen as an indicator of anything else in the industry.
Hot devices skew data
In short, the semi supply chain is heavily weighted by the significant growth (and demand) for tablet PCs and smartphones. Whether or not these end-products are of interest, understanding the situation in the industry necessitates understanding how dramatic the differences are across market sectors and, therefore, that those sectors that support these two end-product devices will show significantly greater strength than all other sectors. Additionally, the overall growth rate (volume and revenue) for the semi industry must also be understood to have a positive uplift as a result of these hot sectors.
Smartphone growth is expected to grow roughly 30% Y/Y in 2013, down from roughly 40% Y/Y in 2012. The deceleration is linked to approaching market saturation for high-end smartphone devices in mature markets. Continued growth is expected for feature phones and low-end smartphones in the EMs. Tablets are expected to see even stronger growth in 2013, increasing by roughly 50% Y/Y.
More than a product drill-down, these two devices represented demand source for components and will influence 2013 production forecasts upstream, thereby affecting supply (type, volume, etc.) during 2013. Previously, the PC sector had driven demand within semi, representing roughly 40% of chips manufactured in a given year. As the PC demand continues to wane, we are seeing realignments and supply chain shifts (i.e., consolidations, manufacturing/production shifts, and CAPEX investments). Despite increases in Ultrabook competition, resulting in price competition (reductions), the sector and supporting components, are expected to remain at a status quo, or stagnant level over the coming few years.
Selected semi sector drill-down
Framing the drill-down discussion are the forecasts for dominant end-devices, namely tablets and PCs. J.P.Morgan reported on 6 Nov. 2012 a revised tablet unit growth forecast increasing 2012 Y/Y growth to 68.2%, up from an earlier 67.5% growth and 2013 Y/Y increase to 52.6% up from 41.0%. Revenue growth for tablets were also revised to 49.4% Y/Y for 2012 and 39.7% Y/Y for 2013. In contrast, the same report reduced the PC forecast for unit growth down -3.3% Y/Y for 2012 with a following +1.3% Y/Y for 2013. This represents a -5.9% Y/Y revenue decline in 2012 and a -2.1% Y/Y revenue decline for 2013.
Displays – LCD, LCD-LED, OLED
Affected by the smartphone, tablet, and PC sector are displays. The TV sector has an impact as well on both semi volume and on displays, representing roughly 20% of semi chip consumption. Displays directly correlate with LCD forecasts, as well as an increase in OLED and some LCD-LED technologies. The TV refresh cycle for flat-panel displays has completed, representing a saturation point. As a result, shipment forecasts for 2012 TV are expected to have declined by -4%, and are expected to remain flat in 2013. LCD-LED increases are expected, but only at modest levels through the next few quarters. OLED TV displays are expected to begin in 2013 at this point, offset from the original 2H12 expected release. This event may spur a refresh cycle but without significant uptake until closer to 2016, according to data from DisplaySearch.
Consensus points to the final recovery having been reached for the HDD sector after the devastating 2011 Thailand Floods which disrupted inventory and the supply chain for well over a year. However, this does not mean there has been any real demand increases. The reason for HDD market weakness is directly linked to the PC demand declines. Morgan Stanley (12/1/12) expects a continued, slow decline in units of -1.0% to -1.2% over the 4Q12 to 1Q13 period, respectively, on a quarter-over-quarter (Q/Q) basis. With forecasts for tablets to outpace PCs on a Y/Y basis in 2013, the outlook for HDDs, of which roughly two-thirds are in notebook PCs, Morgan Stanley is predicting that HDDs peaked in 2011 and will continue to decline based on tablet versus PC end-device demand forecasts. J.P.Morgan downgraded the HDD market in their 6 Nov. 2012 report, forecasting a flat 4Q12 followed by a lowered 2013 HDD forecast with unit growth now at 2.4% Y/Y compared to an earlier 5.9% Y/Y forecast.
However, this situation is also creating some interesting market supply/demand issues because manufacturers have been reducing various capacitance HDDs in line with the market shifts. As a result, there are a number of lines slated for end of line (EOL) and shortages are already being felt. Additional supply pressure is coming from the Ultrabook ramping that continues in an effort by OEMs to stimulate consumer and enterprise demand, however competitive pricing will be critical for end-device adoption in the present market and faced with additional competition from tablet PCs.
DRAM has been similarly affected by the wider supply chain component shifts resulting from the declining PC demand and volume. As a result, similar to the situation for HDDs, manufacturers had reduced supply (production) which in November resulted in a favorable price stabilization. Demand also increased slightly, likely related to the decrease in supply in the market.
With various consolidations and continued careful supply attention from manufacturers (i.e., targeted production reductions), it is anticipated that continued price stabilization is possible. However, that also means that supply issues can arise for specific DRAM product. Some major DRAM manufacturers have pulled back to almost one-fifth of production for commodity DRAM, realigning production to match market demand for mobile and server DRAM, for example. These new product mix strategies are expected to be successful and directly contribute to the wider semi supply chain changes in progress.
According to DRAMeXchange, the DRAM market is forecasted to slow significantly in Y/Y growth in 2013, falling to 19.8% increase compared to 2012's Y/Y growth of 28.1%.
NAND has experienced a robust 2H12 for similar reasons as seen in the DRAM market. Namely, production cuts and product mix realignments coupled with continued high demand for NAND-heavy end-devices (i.e., tablets and smartphones, especially). As IHS iSuppli recently reported (12/10/12):
NAND revenue rose to $4.5 billion, up 5 percent from $4.3 billion in the second quarter, with industrywide [sic] operating profits nearly doubling from $159.2 million to $350.9 million. The strong results marked a satisfying reversal of the sharp downturn suffered in the earlier quarter, when revenue had tumbled from $5.0 billion at the beginning of the year in the January to March period. Results from the most recent quarter also showed industry operating profit margin rising to 7.6 percent, up from 3.6 percent.
While the revenue realignments for NAND manufacturers is positive, and needed, news, a lingering question is whether or not SSDs will see any increased adoption, either in consumer end-devices or in the server market. Conservative spending by both consumers and enterprises are adding to the opacity around this question, and as a result it is unlikely that manufacturers will loosen their tight supply and pricing positions in the event of a negative answer.
2013 forecasts for NAND are, therefore, considered to be similar to what we see now, with stability expected as a direct result of tight supply control upstream. In the event of demand spikes, this could create shortage situations that would vary depending on the cause of demand and whether any greater disruptions affect the supply chain.
This quarter CPUs experienced demand surges, particularly for some Intel products due to a transitioning to Ivy Bridge CPUs. With CPU transitions, the EOL cycle stimulates demand for earlier parts to satisfy service and repair obligations. As with other components directly related to the PC sector, CPUs have faced reduced demand pressures as a result of the reduced PC demand, as Citi Research noted in a 5 Dec. 2012 report on semi components. The assumption for negative growth in PC applications bears directly on specific CPU demand. However, this should not be taken as a negative forecast for CPUs more generally, rather as a sub-type specific situation.
On the positive side, another incoming CPU demand variable was the uptick in Intel's Atom CPUs, which has done well on the market resulting in positive forecasts for 2013 growth, particularly in concert with the growth of the end-device market, tablets and smartphones. This demand will continue to keep the overall CPU market in a growth cycle.
MEMS and Sensors
While microelectromechanical systems (MEMS) only represents a small portion of the overall semiconductor chip market, MEMS represents one of the fastest growing chip sectors as well as one that is intricately tied to the future of wider semi and IC innovation. As noted in a recent report from Yole Developpement, "Status of the MEMS industry 2012," there is significant growth in sensor integration with ICs, namely CMOS MEMS.
As presented recently to a MEMS Industry Group (MIG) panel discussion, by Peter Himes, vice president of marketing and strategic alliances for SILEX Microsystems, supported Yole's finding that MEMS and ICs are intricately tied together, as witnessed by the direction of technological innovation for drivers, interfaces, and the wider computing world interconnect. As Himes argued, MEMS' central integration is continuing to move forward. This MEMS growth is witnessed in more onboard processing and self-contained sensing units that are driving higher sensor integration. In turn, this integration will tie ICs and CMOS closer together with MEMS as single SoC or stacked solutions. In this manner, CMOS and MEMS are inextricably tied together, according to Himes.
Understanding this growing centrality of MEMS helps to understand how this commodity is so rapidly becoming part of the mainstream semiconductor commodity universe. For the 2011-2016 period, IHS MEMS Market Tracker – Q1 2012, forecasts MEMS CAGR to reach +20.7%, with growth across all MEMS applications. Similarly, MEMS is finding increased penetration into devices that span multiple industries, from consumer electronics and mobile devices to medical, aerospace, and automotive. What we see is that MEMS is still on the upward slope with design engineers increasing the technological integration of various MEMS applications not only into devices, but also component structures themselves.
MEMS represents a wide array of suppliers and manufacturers supporting an equally wide set of industry verticals, from microfluidics to 3D-axis gyroscopes and an array of sensors, accelerometers and gyroscopes, to name the top categories. According to data from Electronics.ca, combined, the MEMS and Sensors market is expected to see a five-year CAGR from 2012-2017 of 9%, directly related to the increases in component penetration and demand for various consumer electronics, medical and automotive applications. Many of the high growth MEMS and Sensors sectors, such as gyroscopes, accelerometers, and microphones, are expected to see CAGR of 14-19% Y/Y for the same five-year period, according to various reports including those fromDatabeans and IC Insights.
Also correlated with the strength of end-product demand for smartphones and tablets, the global IC market is poised for continued growth, particularly due to strong demand in subsectors, much as seen in the MEMS and Sensors market. According to recent IC Market reports from IC Insights, "communications and automotive IC markets are forecasted to out-pace the growth of the total IC market through 2016 […]." More specifically, IC Insights forecasts:
a cumulative average annual growth rate of 14.1% from 2011-2016, almost double the 7.4% CAGR expected for the entire IC market during this timeframe. The automotive IC market is also expected to exceed total IC market growth during this period, growing at an average annual rate of 9.0%.
These are striking growth numbers if we consider where the respective IC markets are forecasted to be by 2016, according to the same IC Insights data:
- Communications IC forecasted to reach US $160 billion in 2016, a 94% increase over 2011.
- Automotive IC forecasted to reach US $28.0 billion in 2016, a 53% increase over 2011.
- Analog ICs, particularly for the growing medical electronics and home health sector, to grow to 45% of the total industrial IC market in 2012 and become the largest industrial IC market through 2016.
Not all IC markets are facing booming growth rates though, based on the IC Insights data. As a result of the waning PC demand, the traditional computer IC market is forecasted to decrease by 7.7%, down to 34.0% in 2012 from a 41.7% level in 2011, as PCs are set to use only one-fourth of ICs sold in 2012, and down to one-fifth of ICs used in 2016, based on the latest IC Insights data. Simultaneously, smartphone IC use is forecasted to rise during the same period. These data continue to confirm that the supply chain supporting smartphones and tablets will continue to see solid growth for 2012 and through the forthcoming five-year CAGR period, while those supporting the PC supply chain, are facing increased pressures as demand continues to wane.
Given the breadth of the IC market, the overall trend is one of continued, stable growth forecasting a 4.1% rise in 2013 and a 5.0% growth in 2014, according to the most recent Autumn 2012 World Semiconductor Trade Statistics (WSTS) report. The WSTS also confirms the impact that global macroeconomic uncertainty continues to have in depressing global semiconductor demand in volume and revenue. As WSTS notes, "a healthier global economy will help all chip segments and regions achieve mid-single-digit growth in 2014."
This document presents a market overview based on information collected externally and internally to Smith & Associates prior to writing; events may have occurred after that dramatically affect the forecasts. This document is not intended to provide any guidance for investment, manufacturing, or purchasing purposes. This report provides a contextualized, synthesized, positional view of the global semiconductor industry and selected market sectors.