MarketWatch Commentary

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 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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For the semiconductors and electronics industries, the agility of the otherwise conservative consumer to overcome continued poor, but improving unemployment numbers, albeit very modest.  According to The Wall Street Journal, "consumer spending increased in October by 0.7% as incomes rose and inflation remained low, boding well for economic growth. Personal income rose by 0.2% for the second straight month." (cf also here)  Furthermore, as reported in WSJ, US GDP forecasts for 4Q09 are also on the rise by almost one-half a percent, from 2.7% to 3.1%.

These are important economic indicators because we need to see improvements in consumers' economic health to support the positive forecasts for semiconductor growth today and over the coming three years.  As many analysts have identified, and as we all were painfully reminded during the past 18 months of recession especially, the consumer IS the key to health and growth in our industry.  To underscore this importance, the five growth areas in semis as identified by analysts cited here, here and here are all oriented around the daily lifestyle improvements of the consumer:  netbooks, portable navigation devices (PNDs), digital televisions (DTVs), DVD recorders, and video game consoles.

The direct correlate for improved consumer sales is the critical health of the IC sector in semi.  Sales for ICs seen as remaining at low inventory levels, according to DigiTimes earlier this week ("Taiwan IC designers expect low inventories through January," 11-24-09), but with the requirement of respectable holiday sales, globally.  Beyond inventories is the important compound annual growth rates (CAGR) which are also presently forecasted in the 20 to 30-percent range for the above listed five consumer product areas.  Those are respectable numbers but need the bolstering of consumers who have shed their skittishness and are also looking forward into a more prosperous next decade.

Meanwhile, let's keep our fingers crossed for this holiday weekend's sales results and hope that it is a good sign that Chinese New Year and Valentine's Day fall on the same day in 2010...  Why not, after all analysts and soothsayers all love numerological alignments.  Here's wishing for a happy holiday season.

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As we've been saying since 2007 here at Smith's MarketWatch, a critical variable to keep an eye on is what's happening upstream at the fabs and foundries.  As IC Insights echoes, the lack of CAPEX spend over the past 12-18 months coupled with the number of shuttered lines and fabs due to scaling back and insolvencies, respectively, helped to clear the inventory supply chain, but these reductions now pose a potential problem: shortage.

As we've reported, and as the new IC Insights underscores, utilization levels have been jumping quickly to the point that 90+% is forecasted through the end of the year (Y09), and higher levels for Y10E:

With significant IC unit demand on the horizon and little capital spending being allocated for new/upgraded facilities, industry-wide capacity utilization stands a very good chance of being maxed out in the coming months, resulting in longer lead times, spot shortages, and escalating average selling prices throughout the industry. (click here for source article)

Watch for more detailed analysis investigating the underpinnings of the recovery underway in the semiconductor and electronics industries.  Learn the details in our synthesized, global reports that bring all the variables together for you in targeted articles in the upcoming MarketWatch Quarterly, due out in the next week to subscribers and in early October to the general audience.  Subscription is FREE and takes but a minute. 

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Forecasts for 2009 (Y09) global semiconductor revenue are similarly being revised upward, as Gartner upped their estimates by two percent from an earlier 24.1 percent decline to 22.4 percent, according to EETimes.  The downside to the news from Gartner is that the growth is based on successful inventory management and reductions triggering a recent rebuild state in the PC sector, rather than new demand.

However, IC Insights is echoing the positive trend for 2Q09, showing semiconductor suppliers with quarter-over-quarter sales increases averaging 9 percent, as reported by EDN.  

A model of Intel's 2Q09 offered in Seeking Alpha is also forecasting a five percent revenue increase QoQ for the industry bellweather, based on increases in March sales over February, coupled with an earlier statement by Paul Otellini, Intel President and CEO, "We believe PC sales bottomed out during the first quarter and that the industry is returning to normal seasonal patterns."  (See also here in this Commentary space for an earlier reference to these forecasts by Intel and other analysts.)

Just for good measure, and to add more positive data to assuage even the most sceptical, the Semiconductor Industry Association (SIA) released its April 3MMA numbers showing "worldwide sales of semiconductors rose to $15.6 billion in April, 6.4 percent from March when sales were $14.7 billion [...]."  Again, inventory replenishment was offered as a driver of the improved sales numbers for April, but not a sole driver.  According to SIA President George Scalise, "Consensus forecasts currently project that PC unit sales in 2009 will decline by about 6 percent compared to earlier forecasts of a decline in the range of 12 percent.  Analysts are also more optimistic about cell phone unit sales, which are now projected to decline by around 7 percent compared to earlier forecasts of 15 percent." 

It looks like it's time to use the summer months wisely in preparation for what we all want, a healthy busy cycle ahead.

For a more visual data point, SIA also updated their chart tracking the YoY results since 1996 :

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We all know the names and stories of the innovations that have changed the trajectory of technology as well as the implementation and use of technology.  These innovations are sometimes also termed 'disruptive,' in the positive sense of the word, because they disrupt the norm and open us to new ideas. 

What is out there now that may be among the latest set of disruptive technologies?

Among the top contenders is the rapidly expanding role that microelectromechanical systems (MEMS) are playing in a wide array of electronic devices, from industrial to healthcare to consumer end products.  MEMS are proliferating to the point that their functionality and the user experience generated by them are becoming normative.  As MEMS proliferates, they are becoming less decoupled from the other components and are being designed in/co-designed with ICs.

Another disruptive technology that has been circulating for a while in the R&D discussion space, but hasn't been as prevalent in the commercial sector, is the blurring of the software-hardware divide.  As various electronics are requiring more monitoring for such aspects as power management/battery life, control consoles, and other interface aspects, software is becoming more embedded in hardware.  The most recent commercial news of this disruptive technology is Intel's Moblin v2.0 (read here and here from Intel) that is designed for the Atom chip for netbooks and other mobile internet devices (MIDs).

To be fair, there are many contenders to be included in the next set of disruptive technologies, but what is interesting about these two categories is their connection to the consumer's interaction with the electronics.  As we have been watching in the mobile handset arena, the waterfall path of products cycling from high-end to low-end is rapid and differentiation is now about more than memory or speed. 

As Forrester Research analyst Ian Fogg points out, the product target market, particularly for MIDs, is now better strategized as 'utility and entertainment' rather than  'business or consumer' (well summarized here).  This shift in how we conceptualize markets is a quite disruptively wonderful idea itself.

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While this news doesn't mean that the turn around is here today, these forecasts taken together with other macro- and micro-economic data for the electronics industry are pointing to a positive 2H09.

Of interest is that the positive data percolating up over the past quarter are strong and reliable indicators of an upturn, as discussed in this issue of MarketWatch Quarterly.  Analysts across the board concur that the positive momentum is likely to gain even greater momentum once the recession is over.  As Penn concludes, "The effect of the current downturn will be only to delay the timing of these counter-trends - it cannot reverse them.  In fact it is likely to exaggerate their impact once they kick in, the tighter the spring, the stronger the rebound."

The one caveat that all of us industry analysts keep repeating: inventory issues will continue have a dampening effect unless they can be resolved and kept in check.  In demand-sparse economies, you certainly don't want to be supply-heavy.

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