MarketWatch Commentary

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 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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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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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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The upturn is due to very aggressive inventory management early on, early lowering of utilization levels by panel makers, and now the positive impacts of stimulus packages by Japan and China providing subsidies for consumer electronics purchases.  Japan's package went into effect in mid-May while China recently extended theirs from the initial targeted areas (rural) to now include urban areas and coastal provinces.  According to Citi Investment Research, with these two countries combined representing nearly a quarter of LCD TV demand, the stimulus packages "could have significant impact."

An important source of the positive data is Corning Inc. (a bellweather for the sector), who's chairman and CEO, Wendell Weeks was recently quoted by DigiTimes 6/1/2009, "Our recent checks indicate the LCD supply chain is in full recovery mode.  The LCD supply chain continues to replenish; glass supply and demand is very tight right now [...].  As a result, we are raising our second-quarter glass volume expectations [by 25%]."

Where are these panels going?  Well, certainly many are headed for the LCD TV markets identified above, but the better news is that according to iSuppli data, as reported by DigiTimes 5/27/2009, "flat panel TVs in the US and Canada amounted to 7.8 million units in the first quarter of 2009, up 17.3% from 6.6 million during the same period in 2008." 

According to iSuppli analysts, because of the preference for flat panel TVs, but with the cost constraints on consumers, the smaller panels (32-inch and smaller) have been in shorter supply.  In turn, the supply shortage has presented a pricing increase opportunity that is also helping the supply chain rebound from severe conditions - including price slashing.  While the PC-panel market remains lower than normal, the increase in TV demand is able to offset the sector weakness.

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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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