MarketWatch Commentary

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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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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This is BIG news.

Why?  Well, as DigTimes goes on to note, and as we know, this new processing "is expected to impact on [sic] pure MEMS IC foundries because it completes the whole production from logic IC manufacturing to MEMS IC, which is usually transferred to specialized MEMS foundries.  In addition, customers can more than halve the costs of MEMS IC production [...]."

Tell me more?! 

You can read more about MEMS and why this is important and exciting news in our last issue of MarketWatch Quarterly, "The Small Revolution: MEMS is a game changer."

What are your thoughts on MEMS?

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It was the fabs' dramatic CAPEX reductions that truly ignited my cause for concern many quarters ago (as discussed in this MarketWatch Quarterly article) and made even more worrisome when utilization levels went below 50%.  It is now with a sigh of relief that the situation is truly coming full circle (see this MarketWatch Commentary post also).  Recently, fabs have been posting forward looking schedules to begin the ramp up of 40nm process technology at the end of 2009 - see this early MarketWatch Quarterly article for details on this technology.  This puts 40nm on track for 2010 release and for 2011 as a main process technology.

While overall global capacity even at the 40nm-scale, at this point, is not expected to increase given the continued muted, although rebounding, consumer demand, the cost savings for the fabs by moving to 50nm and then on to 40nm are significant.  DigiTimes 8/17/09 reported Micron's estimates of lowered production costs by 50% for 50nm and an additional 30% for further migration to 40nm.

Meanwhile, TSMC and UMC continue to run at 80% utilization levels again - more good news given the extreme lows just a few months ago.  Both offer that order visibility is good and holding in positive territories.  UMC, as reported by DigiTimes 8/13/09, has also released its move to 40nm process nodes during the end of 2009, adding that CAPEX levels are up and new equipment to further support the next generation technology is purchased.

Others in the Taiwan DRAM production arena are actively seeking funding to increase their production levels.  DigiTimes 7/20/09 speculated that this is in anticipation of DRAM price rebounds during 2H09 - let's hope they're right...

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While the bottom has mostly been conceded for the semiconductor industry, there are still some concerns that recent demand may not be more than the result of the gregarious pull-backs to cut inventory a few quarters ago - as has been noted regularly in this commentary space.  But the numbers coming from foundries, manufacturers, and semiconductor suppliers are all pointing to the more typical, cyclical, high single-digit increases quarter-over-quarter (QoQ) for Q2 and Q3E.  Utilization rates are coming back to normal ranges.  TSMC, among others, are hiring back their employees 'permanently', citing a real end to the cut backs, and some customers of major fabs are being put on allocation, according to EETimes, EETimes Europe, and DigiTimes, during the past week. 

The major analysts, iSuppli, IC Insights, WSTS, all seem to point in a similar direction, that the fab uptick in utilization levels is a signal of a healthy 2H09 and certainly a more normal year-long cycle and growth range for 2010. While the present numbers are not inherently positive, for most companies the trend is up QoQ, but still down YoY.  The general consensus is that the worst is over and a real gear up is under way; thanks in no small part to the aggressive inventory management and utilization slashing that occurred thus far.  

Let the expansions begin - but don't expect to see pre-2008 level CAPEX spends for a while.

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According to sources to DigiTimes Research, as published 4-15-09:

the [overall foundry manufacturing utilization] sector may see [... a] rebound slightly to 50-60% in the current quarter, buoyed by increased orders mainly from the domestic Chinese market [...], as well as more inventory restocking for 3G wireless handsets.

[...] The global netbook market will reach a scale of 27.7 million units in 2009, up 90% from 14.5 million in 2008.  the growth projection outperforms the estimate for the overall notebook market of a 13.2% increase.

These forecasts are echoed through mainstream presses as well, here and here and here, underscoring that a bottoming out for PC, netbook and smart phone/3G sectors has occurred and demand strength is gaining.  With this strength, new competition is likely to be seen as some make new moves into these sectors to ride the swelling wave.

Echoing the analysts' views, Paul Otellini, CEO Intel, was quoted in The Washington Post here, as stating: "We are seeing signs that a bottom in the PC market segment has been reached [...].  I believe the worst is now behind us from an inventory correction and demand level adjustment perspective."

Similar statements from Nokia to The Wall Street Journal here, further the positive outlook: "'The market is no longer falling in a uncontrolled manner, I am encouraged by the signs of stabilization seen at the end of the first quarter,' said Nokia Chief Executive Olli-Pekka Kallasvuo during a conference call." 

Estimates for smartphone growth (not handsets in general!), from components to the entire smartphone handset itself, are coming in between 50-75% for this and next year.

In sum, despite initial worries over the impact of netbooks diluting sales for PCs, netbooks and their cousin, smartphones, are able to strongly attract today's reluctant consumer.

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