MarketWatch Commentary

SEMI's January Book-to-Bill ratio of 1.20 came out last week showing impressive growth numbers.  Since we track these ratios monthly, and report on them when they show particularly important and interesting trends, the January numbers coupled with the news reported here in last month's MarketWatch Commentary further confirms the upward trending.

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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There are many bright chip forecasts out there right now, and with good reason; the data from multiple sources indicate that these positive forecasts are warranted.  Yet, there are financial analysts and some economists still leery of a double dip recession (cf. here (IMF), here (Roubini), and here (SeekingAlpha) for some recent views), which, yes, would logically negatively affect the semiconductor industry.

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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The snow has blanketed COP15, and ice with snow set to fall tonight on the delegates and the country.  It has been an exciting week at COP15 for those of us attending for business and industry - far less frustrating, during talks, than for the politicians, though equally frustrating with the endless lines in the freezing weather for entry to UNFCCC events.

Yesterday's Mayors' Summit was easily among the most collaborative events wherein mayors from many of the world's largest urban centers gathered alongside of academics and leaders from business and industry to meet and share ideas in the old halls of The University of Copenhagen, established in the 15^th century.  ARC3 researchers and mayors agree that while COP15 debates continue, urban centers represent a central variable not just to climate discussions, but also to be the loci of change because of the population densities and increased public health, energy and transportation issues taxing these cities' infrastructure.

So, what does all this have to do with semiconductors?  Quite a lot, actually.  One of the critical issues to climate debates at these levels is people's behavior around energy use and 'smart metering' systems are agreed to be a turnkey device; particularly in the ability to facilitate behavioral change by allowing people to self-regulate, for whatever reasons they choose, their energy use. 

The heart of smart meters?  Yup, semiconductor chips.  These smart meters, along with the necessary investments beginning to roll into 'smart grids', especially in the US, are effective opportunities for improving energy efficiency and reducing energy waste, along distribution lines (the grid) as well as at the consumer level.

What's smart about the new bidirectional meters and bidirectional grid systems? Hardware, middleware and software.  We are in the midst of a new, green economy, as many leading economists here report in personal interviews conducted this week.  For the semi and electronics industry, advanced metering systems (hardware and bidirectional communication grid devices) are likely to be as important to our bright future as mobile phones and laptops have been.  Watch for more details in this Commentary space from all that's being learned by Smith & Associates' COP15 attendance over the next few weeks, and in the January edition of MarketWatch Quarterly.

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With the climb out of global economic recession still stressing the muscle of many leading countries and markets, this year's holiday shopping season will be closely monitored by most industries.

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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We originally asked the question, 'The $787+ Billion Question: Will semi be stimulated?' with the answer being paraphrased as 'likely, but in due time.' 

As stimulus (ARRA) money continues to fund projects intended to stimulate the US economy and workforce, and with the project mandates, particularly from the Department of Energy (DOE) and the Department of Labor (DOL), including the requirement to show measurable, positive economic impact in the short-term as well as long-term, it's time for MarketWatch to review the 'when' answer provided above.

Some of the larger grants from DOE are co-funding critical 'Smart Grid' and 'Smart Meter' projects that are not only moving the US more quickly on a renewable energy track, but are having significant stimulating effects on the semiconductor and electronics industries.

The Smart Grid, and the requisite smart meters to enable the Smart Grid, is, for semiconductor interests, essentially, a bidirectional communication system.  This entails not only an increase in hardware that now is no longer an analog device, but a bidirectional digital device, the smart meter, that also opens the floodgates to the consumer market in the form of various in-home and business devices which allow the energy consumer to directly govern their energy use in real, or near-real time.  The interactive devices, the ability of new consumer devices that can be governed, as well as the meters themselves all point in one direction:  Semi is quite certainly being stimulated and the clock has now been quite certainly started.

A cautionary note:  with SEMI's book-to-bill numbers just out, and the outlook holding steadily in positive territory (happily) but with only slow capital expenditures (CAPEX) increases, will the industry be ready and able to handle these stimulating events?

In the next issue of MarketWatch Quarterly, due out in January, watch for a focused analysis of the effects of the enactment of the smart grid and smart metering technology on the semiconductor and electronics industry. 

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China is one of four featured geo-economies in Smith's most recent MarketWatch Quarterly.  There are so many obvious reasons to continue to monitor China, but for the semiconductor and electronics industries, China is particularly important because its increasing importance as a major consumer market. 

Yes, traditionally in the West, one thinks about China as an export heavy nation.  Based on that perspective, some analysts marvel at China's economic recovery.  It is important to note that while China was hit with negative numbers across the economic board, as almost every other nation, the underlying reason that China was able to rebound quickly and strongly is not due to strong exports. 

How was China able to recover so quickly and sustainably, i.e., show resiliency in the face of global economic meltdowns?  As discussed in the Quarterly article, there are many reasons.  One important reason is the significant government stimulus packages aimed at the Chinese consumer and targeting China's most critical industries, semiconductors and electronics, in particular.  Herein lies the oft forgotten critical variable: the Chinese consumer.  The Chinese consumer has been and will increasingly be extremely important to China's GDP and to most major global industries (cf. also here for a broader Asian perspective).  China is not as heavy an export nation as many assume, and the Chinese consumer is responsible for roughly 33% of China's GDP today and set to expand to 50% over the next 5 years, according to The China Market Research Group.

With a current GDP for 3Q09 growing by 8.9%, and set to continue to rise, understanding the importance of the Chinese consumer is vital to business success.  As a result of the Chinese consumers' positive response to the government stimulus packages, the Chinese semiconductor market, while down 6.7% from 2008, is still almost 10% better than the global semiconductor market, as estimated by iSuppli.  Furthermore, the ability to curtail the economic fall through the stimulus packages, a "recovery in semiconductor demand [...] limited the decline in 2009 and set the stage for a return to double-digit percentage growth in 2010," according to Kevin Wang, Director, China research for iSuppli.

Of importance for the entire semiconductor and electronics industry is that China's resiliency is based on an increasingly active domestic consumer hungry for products across all markets, from automotive, personal electronics, white boxes, and mobile devices.  While there is variability in the 2009 rates of rebound among these sectors, the 2010 forecasts are all double digit.

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Yes, it's true, we can compare to 2007 again (sort of)!  SEMI's preliminary July book-to-bill (B:B) numbers came out in mid-August.  As the following weeks' data still look to support those numbers, it's time to revisit B:B because it is an important variable, one of a series we track regularly at Smith & Associates.

During the interim in B:B reporting, while we were quietly watching the upward B:B climb and reminding you of important stops along the way here, here and here, to name a few posts, momentum has increased and is now finally rebounding steadily. 

Remember that to get really excited by these numbers, we were waiting to see the actual three month moving average (3MMA) dollar amounts get back into better territory.  The B:B ratio is, after all, just that - a ratio.  So, without strong billings AND bookings numbers, we could see a good ratio but it wouldn't herald the type of recovery we'd like.

So, enough of the tutorial.  While I must remind you these numbers are still down YoY by more than half, yes, more than half, they are at least finally getting into better territory and the bumps between months are more compelling - all good news, finally.

The preliminary July B:B is 1.06, which, as SEMI reminds us, "means that [US] $106 worth of orders were received for every $100 of product billed for the month."

Here is a copy of SEMI's data in tabular form (cf.  here):

	Billings (Three-month avg.)	Bookings (Three-month avg.)	Book-to-Bill
January 2009	584.2	277.2	0.47
February 2009	525.5	258.4	0.49
March 2009	438.3	245.6	0.56
April 2009	385.7	249.0	0.65
May 2009	392.6	287.8	0.73
June 2009 (final)	440.5	351.7	0.80
July 2009 (prelim.)	538.0	569.7	1.06

Source: SEMI August 2009

And don't forget to read up on and watch the effect on consumer confidence and the industry (also through investments) as a result of the US government's announcement this morning of the non-farm payroll numbers showing some slowing in job cuts, but unemployment numbers, like elsewhere around the globe, were up into severe territory.  You can start by reading more here from The Wall Street Journal, which is based on these US Department of Labor numbers, here from Reuters, or here from Kathy Lien of FX360.

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Of course we all know the important news out of Japan for 2Q09, the first GDP uptick in five quarters.  That's tremendous and portends serious positives for the APAC region as well as global economic recovery momentum.  But there's more to the news out of Japan: as part of the government's stimulus efforts, increases in public spending and use of public funds to bolster those private companies worst effected by the global recession have made cash available.  With an eye to increased consumer spending in Japan as well as improved export numbers, up 6.5% for 2Q09 QoQ (Credit Suisse Japan Macro Flash 17 Aug 2009), the time to invest in local companies is well aligned and is inline to support the positive trend for recovery.

At the center of upstream semiconductor news is Japan with the now-back-on-again merger of Renesas and NEC Electronic into "the world's third-largest semiconductor maker after Intel Corp [...] and Samsung Electronics Co [...]," according to Reuters recent updates.  One of the hurdles though is the amount of debt refinancing necessary and the issue of government support to the tune of roughly 200 billion yen.  This on top of Japan's recent pledge to help Elpida Memory Inc, also severely hurt by the global economic crisis. 

While MarketWatch Commentary tends to not focus on individual companies, the merger, now seen as likely to be completed in early 2010, signals important changes to the supply chain and the competitive landscape, particularly for MCU production.  As for the impact on the industry, the increase in competition is important and will be interesting to watch, particularly as chip makers were hit hard by the global crisis.  There will be an uphill period for the new merged company, likely to fall under Renesas's name, as a result of redundancies in product, design, and then the restructuring post-merger (see HERE for a pro-con summary from EETimes).

While the impact on the global supply chain is likely to be delayed until the restructuring is completed, the opportunities for Japan to restake it's claim to semiconductor manufacturing are ripe.  Along with other trends diversifying into solar PV and the help to Elpida, Japan will be a country to watch as a new, global economy awakens.

Watch for a review of the new geo-economic landscape for the semi industry in the upcoming  MarketWatch Quarterly.

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With 2Q09 reports hitting the news in greater numbers now, our prognosticating is proving valid.  We've been through a tough economic situation and now it is time to begin the uphill climb back to a healthy semiconductor industry, with the slower macro-economic situation in tow.

The Spring 2009 Forecast from World Semiconductor Trade Statistics (WSTS) came in at -21.6% for the global semiconductor market.  One might think that isn't a number we'd like to talk about, but it is.  Analysts across the board are seeing their variables tracking in stable ranges and showing multiple, verifiable, reasons to believe that upward movements in demand, ASPs, and margins are real.  -21.6% was the BOTTOM!  See also Gartner's latest rosey forecast for 4Q09, as reported here.

SEMI's three month moving average (3MMA) Book-to-Bill ratios show an increase from April's 0.65 ratio to May's forecasted 0.74.  There is more good news here:  April's billings numbers were at a low of US $385.7 million and that number has moved up by just over a percent to US $391.9, which is still an upward tick.  The May bookings levels are up 16% over April and are continuing their upward trajectory.

iSuppli has even joined the choir and they show industry revenue to have contracted by 33.8% YoY for 1Q09.  However, they also offer that it's all upward forecasts YoY through the rest of 2009.

Other analysts echo these results and almost all sources site the strong, continued proliferation of semiconductors in devices across industries as the anchor for sustainable growth.  Continued macro-economic troubles will translate into various geographic regions showing different growth rates and attaining different levels, but improvements are at hand for the global semiconductor industry.

Smith MarketWatch will be closely monitoring and reporting on the important shifts that geo-economic variables are currently having on semiconductor supply chains, EMS-ODM balances, regional strengths, and markets. 

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We've monitored data and provided syntheses in this commentary space and in MarketWatch Quarterly articles, revealing that while we do see meaningful indicators pointing toward a reprieve, we are not out of the doldrums just yet.  There are many questions:  Why aren't we enjoying an exciting and quickly prosperous V-shaped recovery and why still the doldrums?  Will the U.S. face the dreaded L-shaped future that Japan has labored under?  What of the Chinese, U.S. and EU stimulus packages, fiscal and monetary, on top of quantitative easing?  What about the lower oil prices and currency movements?  What about consumer confidence letting up and other variables showing stabilization.  Aren't all of these things enough to push us ahead? 

Two new data points are at the base of many analysts' unease.  The first is the March U.S. trade deficit on goods and services, which is US$3 billion higher than the previous month (moving from $26b to $29b, February to March).  The second worry is the GDP of the US and Euro-zone (EZ) are both slowing because of continued weak retail sales - consumers are saving more than spending (good for the individual person, bad for national and global economies). 

Enter stimulus money, fiscal and monetary.  In the U.S., the Recovery Act is set to address, in part, the reasons behind the lagging retail sales: the unemployment numbers.  People are afraid of loosing or have lost their jobs.  Move people back to employment stability and you can probably get them to spend some money.  Win-win.  But the stimulus money really hasn't hit the pavement yet in the U.S.  (We'll be exploring this question in more detail an upcoming article for MarketWatch Quarterly focusing on the specific immediate and mid-term impact on the electronics industry and supply chain.)  Meanwhile...

China's goal of 8% growth for 2009 might sound like someone was in a coma for the past year, but actually, they might just hit their mark.  Why?  They too have, what the Economist terms, ‘a massive fiscal stimulus' solution in play.  Because China's economic woes stemmed more from domestic issues (only 40% of their GDP is export reliant, as opposed to a whopping 70% of the U.S. and 65% of the EZ, as compiled by FX360.com), and because of the government's ability to ‘ask' for particular types of cooperation, the impact of the stimulus money is hitting faster than elsewhere.  Also, as reported in the Economist:

[...] only about 30% of the government's 4 trillion yuan ($585 billion) infrastructure package is being funded by the government.  Most of the rest will be financed by bank lending, which had already soared by 30% in the 12 months to March, twice its pace last summer.  JPMorgan thinks that this credit and investment boom could lift GDP growth to an annualized pace of over 10% in each of the next three quarters.

There is, of course, more to the Chinese economic puzzle, but the question of fiscal stimulus and it's impact is already being tested in the real world.  The trick is in the implementation, not the intention.  China's path seems to be leading out of the depths feared, will the U.S. and EZ be successful too, once the money reaches the people and projects?  The prospects are good as monetary and fiscal stimulus solutions have the support of most economists, according to WSJ.com.  These economists also point to 2H09 for the end to the recession but add another three to five years for full bounce back.  

For the electronics industry through, until all of the numbers and economic trajectories head into sustained, positive territory, there can be no true positives and increased revenues.  As The Washington Post  states, based on the latest U.S. retail numbers, "Electronics and appliances stores were the hardest hit, with sales falling 2.8 percent as shoppers held off on big-ticket purchases."   Friday's Consumer Price Index (CPI) should give us another means to gauge what the retail numbers really mean and how soon we'll be on the '09 recovery path.

UPDATE: The CPI numbers are in and the news is as economists predicted and hoped, stability reigned last month which is good.  As Reuters summed things up this morning, looks like we are in a pre-recovery.  Finally, some good news on a Friday!

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