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Special Series Wrap-Up: The Emerging Question for Semi Markets
Where are the most vibrant markets today and for the next few quarters or years? This final piece in MarketWatch Quarterly’s year-long series on the global geo-economic landscape looks at these emerging economies.
We often hear that the semiconductor industry is maturing; but 'maturation' does not entail 'saturation.' In other words, the market for electronics products is not saturated, demand remains strong even in unpredicted ways such as during the fledgling rebound and in spite of ongoing global economic volatility and high unemployment in the mature economies. Market expansion, particularly geographically, is still part of the semiconductor’s landscape. As has been lauded for a few years, the next hot market opportunity, or 'golden goose', is understood to be 'the emerging economies', with their 'new middle class' – but the questions of who, where, when and why behind this broad proclamation, are the ones we need answers to for honing our respective market strategies.
Emerging Markets Defined
The next great wave for the electronics industry (and semiconductor industry) is the adoption of new technologies and their end-products by the emerging middle class spanning from Asia Pacific (APAC) across the Indian sub-continent to the Middle East, and, eventually (in both time and space), to Africa. (For a discussion of the Americas, please see the previous issue of MarketWatch Quarterly, and for BRIC see this earlier article.)
During the past year, as the global economy has been rebounding at variable rates, APAC (non-Japan) plus India's economies have been noticeably resuming significant growth, with GDPs ranging from the low 5% to 10%. To put this growth in perspective, the mature geo-economies, Europe and the US, have been moving from barely 1% to just under 4% GDP growth. Despite the possible negative repercussions of current challenges to the mature economies, which are felt globally due to the interconnected nature of economic systems, the forecast for much of Asia and India is good, very good.
In the lead is China, which continues to hum along at 9.1% GDP, "the fastest among major economies" followed by Japan in terms of economic size (cf. Manufacturing.Net here). China also recently continued the move to float the renminbi, after having delayed the recommencement when markets were skittish in April (cf. Financial Times here, free registration required) for more details.
India has seen tremendous resurgence in its GDP levels, now pushing the 9.5% forecasted growth and heading into double digits. The Indian economic situation for semi growth is very similar to China: both have good infrastructure in place, facilitating transportation of goods in and out of manufacturing centers, well-educated populations, good labor supplies, and favorable cost of business. Furthermore, both India and China have the strongest and largest emerging middle classes who are the next wave of consumers. This middle class is gaining in market power through increases in capital they hold from income earned in the growing manufacturing sectors in the countries – it is a positive cycle of industrial growth and middle class income growth.
What does all this mean for semiconductors though? Quite a lot, actually. Foremost is the ability to pinpoint where growth will be geographically and economically. The momentum in the wider Indian and APAC region is significant, has solid legs, and bears with it an emerging middle class eager to be consumers, both first time and early renewers, of new technologies and end-products that ARE the product of the semiconductor industry. Not to mention that collectively, this new middle class, happens to number in the billions of people… Those are nice indicators for a strong semiconductor demand-side future – albeit one that will shift focus from the present end-markets to a new consumer base in APAC and India.
Understanding Asia's next rising tide and appetite for semis
Because GDP and macro-economic trends are more closely connected to semiconductor industry trends, these numbers DO translate into local semi growth rates. In this section, we'll briefly review some country specific semi growth based on forecasted demand trends. In the final section, we'll consider the supply side and explore some data facts to understand the forecasts.
Semi growth
With the bulk of semi production (from fabs to contract manufacturers) located in the region stretching from APAC to India, looking at the overall semiconductor forecasts is not that different from this region's sector forecasts. Quarter-over-quarter (QoQ), semiconductor growth in the second quarter of 2010 (2Q10) is set to continue at or slightly above seasonal trends, around 4.5-4.8% growth, with forecasts for 3Q10 revenue growth of 6.7%, seasonal levels for QoQ cyclicity (cf. Credit Suisse Semiconductors 2Q10 Earning Previews, 7/9/2010 p. 3ff.). Among the sector highlights now and going forward, analog leads the growth, particularly in revenue, followed by PCs which continue to stay strong, as they did through the recession, and then followed by memory and ICs.
More impressive are the year-over-year (YoY) forecasts for 2010. YoY revenue growth for the generalized semiconductor industry is forecasted at 32%, the second highest level in 10 years (cf. iSuppli here). Among the most important aspects of these quarterly and annual forecasts are the continued healthy days of inventory (DOI) levels for the supply chain. While we are experiencing shortages across many sectors (especially for analog, ICs, some memory and for equipment), there is an upside in that ASPs have improved as have margins for many (excluding some memory sub-segments). Growth and demand are set to continue and the lower inventory levels translate to continued health in the supply chain for the rest of the year.
Looking to 2011, growth is set to normalize around 7%. During 2011 the new fabs, from existing CAPEX spends, will begin coming on line. When these new production capabilities are realized, the critical variable to growth changes focus from the extra weight on macro-economics back to maintaining close DOI and restraint on utilization so that supply levels are kept in check; thereby not reducing ASPs and negatively impacting semi growth and revenue forecasts.
Also important in the equation is where the new fabs are to be located. Because many of the new fabs and assemblies are being used to transition to new architectures and technologies and to target new demand markets, there is greater freedom in how and where to spend the large CAPEX budgets (cf. ElectronicsWeekly here for an overview). While some are staying in China, there is a notable shift away from the coastal areas to inland and western provinces. For example, with 40% savings from lower wages and incentives, the western technology hub of Chongqing is seeing significant growth (as reported here in MarketWatch Commentary). The strong macro-economic picture for Southeast Asia is critical in the decision to expend CAPEX in the wider region (cf. The New York Times here). A similar trend is being seen as regional localization opportunities are being realized by many with moves to Malaysia (e.g., The New York Times here), Singapore (e.g., EETimes report here), Thailand (e.g., The New York Times here), Vietnam (cf. The Economist here, paid subscription required) and India (e.g., EETimes report here). There are also ongoing ramps and expansions in Taiwan, Japan, South Korea and China underscoring that it is not an exodus, but a diversification and a regional expansion that we are seeing.
Demand trends driving growth
Focusing on the APAC and Indian sub-continent regions, the end-market demand drivers are important to highlight, because they support the near through mid-term growth. Importantly, the various regional governments have all been cited by analysts (financial and industry based) as actively supporting (through financial incentives) the increase in technology centers for manufacturing, assembly of semiconductor components, and/or final assembly of electronics end-products.
The following is a summary of the top demand drivers for the new, emerging demand base in APAC and the Indian sub-continent:
- Energy efficiency, 'green' electronics, and renewable energy technology (esp. LED lighting and renewable energy, spurred by China's '125 plan' (cf. here for a financial analyst's précis of China's 125 plan)
- Communications (from mobile handsets to network infrastructures for corporate and infrastructure (3G, broadband and cellular builds))
- Automotive (the regions' auto demands have outpaced mature regions and will continue but hopefully with high efficiency vehicles in the fore)
- PCs – particularly the adoption by consumers of lower-priced computers with slightly fewer features (esp. reduced memory)
- Continued transition to LCD TVs (replacing CRTs)
- Consumer electronics in general (includes above mobile handsets, auto, PC/computing, and TVs, but also includes white boxes and other devices)
Semiconductor component trends necessarily follow these demand end-markets, with memory (especially flash NAND), analog and mixed-signal analog ICs, LEDs, and LCD panels in the lead. With the strong global demand for consumer electronics, the semiconductor market segments will experience, on average, a 30+% growth this year with ongoing product segment expansion by 20+%, followed by a resumption of normal growth in the 7% range sometime in 2011 (cf. iSuppli here). Although, another black swan may lead to increases in the longer-term forecast should the 'emerging middle classes' across the APAC-Indian region increase demand at a faster pace.
Whither the suppliers may go
On the supply side, there is a lot of movement, so much so that some industry reporters have wondered about the sustainability of the investment builds and utilization levels (>90%) that the industry is presently supporting. The numbers tell a different story, one that is more conservative and that does not warrant caution: DOI remains at historical levels below five year averages (32.0 days and supply chain seasonal inventory days at 2.5 days QoQ), and CAPEX investments, while healthy this year, are the second lowest in history at 14.8% (CAPEX/revenue ratio) and 2011 forecasts are for 17% of revenues (a 19% YoY increase, which is historically low) (cf. Credit Suisse, Semiconductors 2Q10 Earnings Preview, 7/9/2010 pp. 8-16).
Summarizing the industry, from 3Q08 through 1Q10:
total semi capacity (measured in wafer starts per week) has decreased 15% from its peak […] with the decline driven by (1) the closure of older generation 200mm fabs at memory (DRAM and NAND) and integrated device manufacturers, (2) fab consolidation across the entire industry (including analog), and (3) bankruptcies (QI, SPSN). (ibid, p.15)
While capacity is set to continue at the >90% utilization levels for the next four to six quarters, there are few concerns because of the low DOI coupled with the low starts. Add to these favorable numbers, the continued demand that has barred any significant DOI increases along the supply chain, and the concern further diminishes. The CAPEX spends, are still low in a historical perspective, and furthermore, the new fabs and lines are primarily earmarked for next generation chips. In short, supply is seen to remain tight. The transitions forecasted are for new locations as well as for some retooling. However, with demand as strong as it is, taking anything offline for retooling is not a strategy we're seeing play out.
So what are the supply strategies shaping the semiconductor industry for the remainder of 2010 and forward? In addition to the CAPEX spend for lines and R&D, OEM spend is also set to increase, as are EMS spending levels. According to iSuppli here, OEMs and EMS providers are increasing spends to double-digit levels in response to the healthy demand in the industry and in order to capitalize on the current window of opportunity to increase market share.
Where this market share will be realized is an evolving question. There is considerable movement westward, or inland, in China for technology hubs, but also in Korea, Taiwan, and Japan, especially for the locally and regionally based Tier 1 companies. Further afield, there is increased momentum to Singapore, (free registration required), Malaysia, (free registration required), Thailand, Vietnam (paid subscription required), and India, particularly with specific end-market components and/or products (e.g., automotive, renewable energy, LED, as well as IC-packaging (registration required), and silicon production, among other components).
There are so many directions (from market share to geography) in which suppliers are moving, that it can be difficult to coherently capture this dynamic period in the industry. However, there is an elegant summary, albeit stating the obvious: regional expansion is occurring from APAC west to India. Investments are up, forecasts are very strong for the 'new middle class' in this broad region, and GDP growth supports economic stability and capital flows set to attract additional investment in manufacturing, assembly, and end-market (i.e., consumer electronic) penetration.
One last point needs to be addressed regarding suppliers and locations, particularly for the EMS sector: The question of labor in China. There has been significant discussion regarding possible reverberations of the wage and labor problems coming to the fore in China. While wage increases do entail cost increases at some point(s) for some companies, this is not the first set of wage increases to hit manufacturers in China. Chinese wages have been rising at considerable rates for two decades, as modeled by analysts at Credit Suisse (cf. Asian Daily: Asian Technology Strategy 6/25/2010, and Asia Technology Strategy: China tech manufacturing model still has legs 6/24/2010). According to Credit Suisse's models,the China prognosis is not one of mass exodus as a result of wage increases nor labor shortages along the coastal provinces. Rather, they cite significant labor resources based on the continued high percentage of farming laborers that could enter the manufacturing sector. Furthermore, Credit Suisse analysts report that the movement of production to inland China provides enough savings, from 25-40% to lessen the likelihood of companies departing China.
More recent manufacturing reports do show a slow down in output and a weakening in the purchasing managers' index (PMI) for South Korea, India, Australia and China, as reported here (free registration required) by Financial Times. These numbers do not raise contraction concerns yet, rather a welcomed slowing to return to more normalized levels after a very heated post-recession rebound. However, coupling this slowing with the increased concerns over tightened margins for coastal China and the lack of semi manufacturing expansions, there is an increased chance of new construction and new contracts being awarded outside of China. As iSuppli reports here:
The era may be coming to an end when fabless suppliers look to China for low-cost manufacturing that could be used as leverage to obtain lower pricing from other foundries […]. With no significant manufacturing expansions in China during the past two years, and with no major capacity increases forecasted for this year, this prediction may come true quickly.
While the opportunities in China continue, the recent PMI slowdown and chance to diversify hub locations present opportunities for manufacturers to invest beyond China. There are visible signs of increased manufacturing spreading through the broader Asia-Pacific (APAC) region stretching to India. Locating closer to the new demand-base, the 'new middle classes,' is a strong driver, particularly when coupled with the renewed confidence in the economic and geo-political stability of the wider APAC to India region.
These economic shifts are important because they not only portend changes leading to a wider distributed manufacturing base, but more importantly, there is a larger, looming question, that of a re-weighting away from the mature consumer markets to the emerging ones. That means changing focus from non-high end consumer electronics to the products that meet the needs and demands of these new consumers. That is not to say that OEMs will shift focus away from their existing, mature markets. Rather, the dominance afforded by the mature economies' is likely to dissipate in favor of greater attention to the growth and demand for consumer electronics in the emerging geo-economies.
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