MarketWatch Commentary

PC World reports an interesting prediction from an ARM executive:  Over 50 new tablet PCs will be introduced this year.

View the PC World article here.

If true, this is good news for Intel and ARM and every other company that supplies components for these devices.  But what does it mean for the open market?  At Smith, we think it will result in volatility.  The already diverse landscape of processors is becoming more so.  These new devices will mean even more processor configurations and even less certainty for end-product production forecasts.  Demand and supply will both be affected.

The volatile market outlook for mobile processors will make open market solutions vital for manufacturers.  Nimble, just-in-time sourcing that counts the open market as an important channel will win the day.

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With the epicenter located 250 miles south of Taipei, Tainan recorded a magnitude 5 while Hsinchu recorded magnitude 2 levels.  Both levels are significant and have impacted operations at these two important areas for semiconductor and LCD production due to power loss, temporary stoppages, equipment damage, and product damage or loss.  The mid- to long-term supply chain effects are forecasted to reduce or eliminate any downward pressure on ASPs, especially for panels, which were facing lowered pricing pressures.

The following are still initial reports and are likely to be modified as more time allows for more data and information to be collected:

Wafers:

• TSMC is still assessing final impact, but a minimum of 40,000 eight-inch wafers, roughly 1.5 days worth of production, was lost.  TSMC's earthquake contingency plans are in place and moving the company's facilities and processes through the disruption. (see here for source information).  The impact on 2Q10 revenue has yet to be assessed but initial estimates are at ~1%, as reported by The Wall Street Journal.
• Advanced Semiconductor Engineering, Inc. reported minor disruptions, is still inspecting packaging equipment, reviewing financial losses, but told TheWall Street Journal that production has resumed.  Bloomberg reported that the Kaohsiung plants were operating normally.
• UMC reported minor damage to some production equipment but did not report any significant impact to their operations, as reported to Bloomberg.

Displays:

NOTE: the average time that the following companies have taken to resume normal production after a temporary shut-down is 2-5 days after an earthquake, according to DisplaySearch Blog.

• Hannstar Display Corporation, had evacuated employees and shut down the factory temporarily but did not otherwise report any losses or effects on their production according to both Bloomberg and The Wall Street Journal, and confirmed by Smith & Associates locally.  DisplaySearch reports HannStar's took 3-5 days to resume production after the last earthquake. 
• AU Optronics Corporation also evacuated employees and temporarily shut down production at their Tainan facilities.  They have reported to newswires that their finances and operations suffered "no significant impact."
• Chi Mei Optoelectronics also reported temporary shut downs and evacuations but added that resumption of full production activities is likely to take one to two days, as reported by Barron's.  DisplaySearch reports an average of 2-3 days for CMO to resume production post earthquake.

More detailed information about glass substrate production is provided in detail by DisplaySearch here.

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Tablets, 'toughbooks', 3-D laptops and displays have dominated the industry news and analysts' blogs lately.  But, the question remains, what will adoption be by consumers given the tepid consumer economic climate?  One answer that shines positively in favor of these newer devices' adoption, and therewith success, is their use in the medical electronics market.

At this week's Healthcare Information and Management Systems Society 10 (HIMSS 10) conference, the electronics industry is in full display to aide heathcare in pushing farther into the electronic records, electronic check-in and billing kiosks, mobile networking and field care settings, patient monitoring, thin-client mobile workstations, and new procedures.  Not only new and dedicated medical electronics devices are on display, but also improved battery solutions, nanotechnology, sensors and the applications for these critical technologies.  A nice review of some of the top devices for more mainstream adoption is presented here by Channel Web. 

Additionally there is the consumer end of medical technology, whether for patient monitoring (self or automated reporting, such as this example).  Interestingly, in this sector much as we've seen with automotive electronics, the established companies are starting to feel the impact of new entrants to these markets as diversification is still par for the course in tepid waters.  We at Smith's MarketWatch will be watching the momentum and marketplace jostling.

As mentioned, and of particular interest to the MEMS and NEMS sectors, medical electronics is showing some exciting advances from nanotechnology to mobile devices and the funding from governments, such as the US ARRA among others.  Coupling this governmental support for medical electronics with the need to support these low volume high mix and highly precise markets we are seeing the medical electronics market becoming a beacon for many, as presented above. 

Another variable worth watching in the medical electronics market is the geographic diversification: will medical continue to be the dominant domain of European and American companies or will the field spread out more as more players enter?  For more on Europe and medical electronics, be sure to read this article in Smith's recent MarketWatch Quarterly. 

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That's all fantastic news.  We also know that there are numerous reports and forecasts of shortages set to continue for a handful of sectors in semi, due in part to the lean inventory management that saved many during the recession, and due to the reduced utilization levels and CAPEX at the fabs for a few years that have also reduced capacity in the market.  These variables have helped strengthen ASPs and resumption in some consumer demand has also helped orders as reflected in the strong three month moving average (3MM) book-to-bill ratios with billings at US $946.3 million and bookings at US $1,132.4 million (=1.20 ratio). 

January's positive indicator has not been matched by uniformly positive macro economic forecasts for the later half of 2010.  While we see very strong numbers for this year (Y10), the financial analysts are either getting bored with the better times or there are dips ahead in our ongoing roller coaster ride. 

At MarketWatch we've been noting the connection between semi's health and consumer demand for years.  That means, of course, that we need to think smartly about this 'rebound' year and not expect an easy upward trajectory revenue ride. 

The Information Network was reported by DigiTimes on 2/23/2010 as forecasting a "mid-year Y10 slowdown in semiconductor revenues [...].  Personal consumption will remain sluggish in the second half of the year because of a jobless recovery, further deterioration in credit, and continued weakness in home prices."  These concerns are echoed here in Manufacturing.net but with predictions moved to 4Q10.  Wall Street analysts tend to see greater storm clouds, such as this one, but as financial analysts say, "that and $2 will buy you a cup of coffee." 

Here at MarketWatch,  we'll be monitoring ALL of the information to provide you with reliable insight, as more data unfold and can be brought into a fuller analysis.  Watch especially for our next Quarterly edition in April where we'll feature the economic state for semi in the Americas.

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The ability to correctly and accurately determine races and competitions is essential.  We are also now well beyond the early 20^th century games where stopwatches and pieces of paper were the gold standard; see here for a nice history of Omega and the Olympics.  Now it is the passing through a light beam that triggers a start and finish based on highly precise electronic timing and digital information from sensors, cameras shooting at 2,000 frames per second, and timers that provide judges with an important data set sent directly to their laptops in order for them to make their decisions and place the athletes (see here for some of Omega's photo finishes).

Even those not competing based on speed, but on precision or completion of required routines, find their sports well grounded in high-tech electonics.  Skaters are filmed and photographed digitally so that it is not a judge's memory, attention, or perspective upon which their medaling rises or falls.  Judges can now immediately review what just happened while also providing their qualitative assessment of the athletes' performance.  Similarly, we, the audience, are now treated to the "ghost" imagery of multiple athletes on the same course to compare the differences in performance and technique, or moving digital lines to show what's needed to attain a spot on the podium; these data are, again, provided by advances in electronics and wireless communication.

So, as the games begin to wind down, remember that the semiconductor and electronics industries have been playing critical roles in the Olympics; from the years of training where athletes and coaches monitored and improved their daily performance all the way through to recording the finish lines and last routines to provide critical data to the judges' decision trees.  But, as the cnet author points out, you still have to make sure the judges know how to read these new data, now that "a pixel of difference" can be the difference between a gold, silver or bronze medal.

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At Smith we buy and sell memory every day. We handle DRAM, SRAM, Graphic RAM, Nand and NOR Flash. As the commodity manager for memory I can see supply and demand across components and across our global offices, which gives me a pretty complete world view of the memory market. Here's what I see for 2010:

• 2010 should see constant tightness and long lead times on most types of memory all year. The main two reasons are 1.) Due to the credit crunch, chip manufacturers reinvested less in 2009 to grow production capacity than in previous years. Although 2010 will see a return to high re-investment in this area, (a predicted $8-10B worldwide) it will not have an effect on production capacity until at least 4Q10. 2.) The wide array of products now available from chip makers makes it harder for them to forecast accurately, which is exacerbated by the continued introduction and successes of new products and fads or unforeseen failure or obsolescence of technology in the retail market; which increase or decrease expected demand accordingly.

• Over the last year almost every chip manufacturer has gone from a commodity "build-it-and-they-will-come" plan - where they build a bit of everything and hope the customer will come calling - to a "build to forecast, but forecast accurately" plan. That means fewer parts in excess on the end user shelves, longer lead times and stricter ASPs. Industrial and extended temps parts, odd cas latencies, slower speeds, and odd packages (BGA for DDR1 and SDRAM, since TSOP is the norm) will be the casualties in this plan, and become more and more scarce as we move further into the year.

I see these factors affecting the market of the various memory types in 2010 differently.

• Personal computer demand around the world continues to climb, especially in China and developing countries. Though the demand for desktop PCs is growing at a lesser rate than it did during 2009, the higher rate of laptop demand more than makes up for it. That, of course, means demand for DDR -- a mix of DDR2 and DDR3.

• At the end of 2009, DDR3 was used in about 25% of the new computers - PCs, laptops and servers combined - coming out. By the end of 2010, it should be up to 75-80%. While DDR3 will not have many other usages outside of this area, it will be the mainstream technology for most new PCs; PC3-10500( DDR3-1333) being the principal speed.

• Look for server demand to continue to pick up in 2010; many companies who have put off upgrading or re-invigorating infrastructure for the last couple of years really need to do so now, as software demands upon a network are at an all time high. New servers developed in late 2009 and 2010 will use DDR3 memory. However, DDR2 production cutbacks at the chip manufacturer level should make DDR2 server modules and components harder to come by. We've already seen open market demand increase and pricing up 5% in through January end.

• Already, DDR3 delivery is behind demand and that should continue during the first half of 2010. The estimate is DDR3 overall will be 2-4% short worldwide for the entire year.

• The introduction of memory hungry Windows 7 will also help increase the GB/unit in the PC arena.

• As I noted earlier, the rise of DDR3 will mean the demise of DDR2. Over 2010 it will drop from being in about 75% of the new computers to about 20-25%. But again, production cutbacks on the chip manufacturer level should make DDR2 availability tight.

• SDRAM PC133 demand should decrease some in 2010 vs. 2009, but with wafer start decreases and EOL-ing of highly popular configurations or accepted generation revisions, availability will be limited. Lead times and pricing will likely increase throughout the year from all MNFs. Already Samsung and Micron have plans to EOL their very popular 32x16 SDRAM, which should start causing some problems come March. So, though demand will be down in 2010, pricing and should stay high and lead times long all year.

• The Graphic RAM market is still in shortage due to the demise of Qimonda, but it is beginning to right itself. There are still shortages and long lead times and we expect to see that continue until at least mid-2010. Most MNFs however, have EOL-ed their multiple technology offerings to concentrate on gDDR3, which pairs best with current motherboard/PC needs. So builders must be highly aware of lifetime estimates in this area if creating new products.

• Nand Flash pricing has steadied due to production cutbacks and rising demand, a trend which should continue throughout 2010.

• Lower density NAND products, 1Gb and below, will all soon be going EOL one by one - starting at the smallest - and we could even see 2Gb & 4Gb go that route by the end of the year if chip production capacity does not increase. The continued introduction of new products using NAND as the main data storage also contributes to tightness on mid-range densities (8Gb-64Gb) and longer lead times. Fewer wafer starts on SLC product is causing longer lead times and tightness for NAND, and possible trouble in the industrial, aerospace, military and automotive fields.

• For NOR Flash, usages are continually shrinking, but it will continue to be hard to find in the open market. Continued monetary uncertainty at Spansion, talk of Samsung stopping production, and rumors of a Micron/Numonyx merger make the NOR market unpredictable.

Thus, I expect in 2010, memory chip makers will likely: Promote DDR3 for computing; cutback on general DDR1 and SDRAM wafer starts; level off DDR2; and make only enough NAND Flash to fulfill forecasted orders, promoting higher densities over smaller densities.

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According to iSuppli, "Global revenue from shipments of large-sized LCD panels [...] is set to rise to $49.2 billion in 2010, up 40 percent from $35.2 billion in 2009."

A trend we have been watching is the precedence that manufacturers are giving to TV panels because of the increased profitability of these panels over others.  As a result of the TV panels having manufacturing preference, the labor shortages ongoing (roughly 10% labor shortage in Asian manufacturing facilities persists), and the component shortages for LEDs and driver ICs, non-TV panels are experiencing shortages and extended leadtimes.  For example, the CCFL notebook panels are very short for two reasons: (1) these CCFL panels are being replaced with LED models; and (2) manufacturers are not putting CCFLs, especially for notebooks, into production schedules because of the focus on TV panels first, then LED notebook panels (particularly the netbook and 15.6" panels), and finally monitor panels.  It is very unlikely that we'll see room on the lines for any CCFLs.

Looking at the larger market revenue picture for panels, at the root of the 2009 revenue decline was the 32" panel's loss of profitability.  The thrust for the resumed market growth is the larger TV panel sizes (that is China's preference for the 36" through 44" models presently) and the improvements in production efficiencies coupled with reduced costs thanks to upgraded production fabs.

New production fabs for TFT LCD makers are the main display news story this week: while Korea had loosened legislation for its companies to begin fabs in China, Taiwan only did so this week.  Each government imposed different constraints on the builds: Korea did not regulate the generation of the fab, but did mandate the use of domestic equipment; Taiwan did not specify equipment, although did impose quotas (limit of three) and other requirements, such as the "N-1 rule: The fab generation has to be to [sic] one generation behind the highest generation in Taiwan," as reported by DisplaySearch.

These new TFT LCD fabs are being quickly bid on by the major panel makers and with Chinese demand so strong in addition to global 2010 forecast upticks, this will be a developing story to watch.

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The lynchpin necessary to avoid such a double dip is not the US, but China.  It is the Chinese monetary and fiscal policies that are critical to the continued forward momentum for the global economy, as seen expressed by The World Economic Forum, which held it's annual meeting last week in Davos, Switzerland. 

The Davos Forum was a critical event not just for the global economy but also for semi: China reaffirmed that it is committed to "continue with accommodating fiscal and monetary policy, and make sure we have smooth macro-management, [...]. We are shooting for roughly 8% or 9% GDP growth rates," according to Zhu Min, Deputy Governor of the People's Bank of China as quoted in this transcript from the Davos Forum.

It is China's continued stimulus policies that support the broader trends in the global economy presently.  Particularly important is the driving role of emerging markets such as China and India with their significant consumer demand for handsets, computers, networks, and the infrastructure that promotes increased overall semiconductor demand, according to yesterday's SIA release.  As George Scalise, President of SIA, stated, "with improving consumer confidence and signs of economic recovery around the world, the semiconductor industry is well positioned for growth in 2010." (Ibid)

For more information and Smith's perspectives on these topics, including our recently  released MarketWatch Quarterly, consider our discussion of the semiconductor industry and the latest news about the global economic rebound here in this MarketWatch Commentary section.  In the last issue of MarketWatch Quarterly, we provided a more detailed review of China's geo-economic policies and role in the semiconductor industry here, and in this earlier piece, a review of the US stimulus policies.  Finally, we considered the role of new consumers and new electronics products for consumers in the latest MarketWatch Quarterly released last week to subscribers and next week to the public here. 

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EMS companies have been faring well, relatively speaking, and the strategic moves to diversify into new markets with important core capability links has analysts and market researchers generally more bullish than conservative. 

What is particularly interesting, as we continue to watch the ongoing EMS-ODM turf war (cf. MarketWatch Quarterly Vol. 1:1, "EMS/ODM a Mixed Market;" and Vol. 2:2, "Co-Evolution and Organic Growth"), is the varied strategies EMS companies are embracing.  As well presented in the latest MMI (Vol. 20:1, pp. 1-4) report, some EMS companies are following a new, retail path (e.g., Hon Hai's retail outlets); some are expanding to sister industries (e.g., Jabil's venture into solar panels and medical disposables); some are supporting new supply chains for the still fragmented clean/smart technologies (cf. the latest MarketWatch Quarterly Vol. 3:4, now available to subscribers and next week to the public); and some are engaging in more traditional M&A deals to expand their market reach and capabilities (e.g., Celestica's acquisition of Invec Solutions, as reported in MMI Vol. 20:1, pp. 2, 7).

Among the other trends forecasted by market analysts, we should see a resumption of more normal consolidation numbers for small- to mid-sized companies, renewed momentum for regionalization/localization (cf. MarketWatch Quarterly Vol. 2:3, "An Expanding European Microcosm" for more discussions on localization), and continued distinctions between EMS and ODM businesses but with increased "credibility to a hybrid strategy" (MMI Vol. 20:1, p.4).

The next one to three years hold promise for the EMS sector, and based on early analysts' reports for 2010, the new market opportunities may provide important growth for EMS in directions beyond the past 'turf wars' with ODMs.

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The semiconductor industry has been faring better than many industries based on 4Q09 reports.  The 1H10 forecasts continue to show the tendency for pent up demand to be strong from consumer and corporate sales alike.  However, with the loss of almost two years of CAPEX investments to support fabs, the growth that we're engaging now may prove to be a tough challenge for the industry because of these "missed investments," as underscored by Bill McClean, President of IC Insights.

According to McClean, IC Insights research and data show that despite the "worst recession in 63 years (since 1946) in 2009, flat PC unit shipments were quite an amazing accomplishment. Moreover, cellphone unit shipments were down only 5%.  Now consider that both PC and cellphone unit volume shipments are forecast to increase at double-digit rates in 2010."  This begs the following questions from the recent McClean Report: "What effect will this have on the IC industry? Are we on the cusp of an all-out IC market boom for 2010?"

IC CAGRs are forecasted in the 9% range; ASPs and revenue are set to rise across the board for memory, even for DRAM;  increased demand is expected for PCs; and emerging economies' consumers are hungry for electronics.  Underscoring this positive reality is the recently released, strong, 9%  increase in North American-based semiconductor equipment manufacturers book-to-bill ratios, now at 1.03 for December, holding onto a 6-month rise. 

The 2010 forecasts are no longer just New Year's dreams.  While exciting and welcomed news, these forecasts pose interesting challenges for the industry that must now grapple with being able to meet what TSMC calls "urgent recent increases in customer demand."  TSMC has begun both new construction and capacity expansions at their fabs in Taiwan, increased R&D spending for 2010 by 25%, and plan to hire 3,000 new staff, "primarily engineers." 

Those companies who remain from the last round of survival of the fittest now have a new, positive battle ahead.  Economic indicators are up 1.1% for December 2009 and point to economic growth this Spring.  Are we really ready?!

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