The forecasts seem to be revised daily as the downward spiral continues.  Global semiconductor revenues for 2009 are tracking in Gartner’s forecasted  -24.1% to -33% range from 2008 levels (www.eetimessupplynetwork.com/214502894 and www.fabtech.org/lib/printable/3465, respectively) and SEMI’s January Book-to-Bill ratio is down to 0.48, “the lowest levels since 1991” (http://www.semi.org/en/Press/CTR_028380). 

The good news is that these forecasts model this first Quarter (1Q09) as having the lowest dips in revenue and negative data; in other words, it may be the anticipated bottom to the market decline.  All data thus far point to this forecast as holding; even initial, positive data have emerged, such as the initial recovery of IC ASPs (http://www.fabtech.org/lib/printable/3511).  It’s okay to breathe now. But, there will be additional insolvencies and consolidations, additional supply chain disruptions, considerably challenging markets (both supply- and demand-side), and precipitous hurdles to overcome – you’ll need that newly acquired oxygen.

Companies along the semiconductor value chain must look anew at inventory, supply chains, industry indices, market sectors and product design as well as product marketability.  Not only have we entered a new era for global economies, but the semiconductor industry has also turned a new page, as supported by the correlations of industry specific variables to macro economic trends (cf. MarketWatch Quarterly Vol. 2:4).  All companies along the entire electronics supply chain (from semis to solar, from MEMS to analog ICs) must position themselves as market recovery begins later this year with continued positive growth forward.  2012 is consistently and realistically earmarked as the year during which global semiconductor revenue levels will return to 2008 levels.  However, the number of companies remaining and the resulting supply chain, markets, and power balances will have shifted dramatically (cf. MarketWatch Quarterly Vol. 3:1, “The Supply Chain is Ground Zero: The remaking of the Semiconductor Industry”, this issue).

Supply chain health: Supply trend analysis
The extreme business situations arising out of the ongoing global economic crisis warrant careful consideration and monitoring.  Visibility has been either absent or so short that many companies, including Intel, have not been providing forecasts during quarterly reports.  Below, we have compiled and synthesized vast amounts of data from sources throughout the semiconductor industry and the financial sectors. 

By following the variables that cover the widest scope, i.e., have the broadest touch, across the semiconductor industry (rather than considering only the types/topics of the data), we present a means to navigate through the new reality we face today.  Our industry data and variables have shifted in their weighting and meaning as a result of the global economic situation. 

To understand and contextualize the important variables and data that tell us the honest story about the depth of today’s problems and tomorrow’s challenges and opportunities, we begin by considering a supply trend analysis following the broadest metric, inventory as it is distributed across the supply chain.  From there, we narrow into more focused variables that have more narrow scope but allow us to have touchstones to gauge the validity of our analyses while tempering positive and negative trends. 

Finally, we consider a demand trend analysis moving again from the widest scope variables to the more narrow and conclude with realistic challenges, opportunities and guideposts for today’s volatile and demand-sparse arena.

Inventory levels
In this very difficult to read market, inventory levels have been a brighter spot.  Indeed, there are some voices offering that forecast visibility is improving as a result of the responsible, proactive inventory management aided by fab utilization reductions (www.edn.com/article/CA6641007.html). Improved visibility equals greater predictability.

The tempering question for this dawning optimism and the observed increased visibility is the extent to which January being only ‘slightly below seasonal’ will hold through February and March and see both revenues “grow ~ 1000bps [basis points] ahead of normal seasonal sequentials of -7% and +19%.” (Credit Suisse Equity Research Semiconductors (Sector Review): January Taiwan Monthly Sales 20 February 2009, p.7).  See the following Figure 1 from Credit Suisse (ibid) representing these data:

Figure 1.  Credit Suisse estimates for linearity/seasonality (source: Credit Suisse Equity Research Semiconductors (Sector Review: January Taiwan Monthly Sales 20 February 2009, p.7).

These are notably difficult data points to reach in today’s tough economy where, as everyone has noticed, the consumer is just nowhere to be found.  Further muddying the inventory waters is conflicting data being reported by Gartner at the end of February “warning that its Dataquest Semiconductor Inventory Index (DASI) rose to its highest level in seven years in the fourth quarter of 2008.” (www.fabtech.org/lib/printable/3488).    

Figure 2.  Gartner’s DASI rose to highest level in seven years during 3Q08  (source: www.fabtech.org/lib/printable/3488). 

The dot-com bubble in 2001 taught us that inventory levels are important not only to gauge the present health of the supply chain, but also to gauge the speed at which the industry can rebound once recovery begins.  In today’s semiconductor industry, inventory levels are even more critical than during prior periods because inventory is being held at all points along the supply chain from chipmakers to OEMs and all the way down to distributors.  This model has a more distributed liability which is good for some players, but poses additional risk for others who may not have experience in dealing with inventory exposure (www.purchasing.com/article/CA6623616.html?q=semi).

A more detailed look into technology and supply chain inventory levels, as presented below in Tables 1 and 2, confirms the overall downward trends that supports Gartner’s concerns, but also note that these numbers are not as bad as they could have been:

Table 1. Inventory levels of products across the supply chain in days and Q4 change (source: Credit Suisse Equity Research Semiconductors (Sector Review: January 4Q08 Inventory Analysis 06 February 2009, p.11).

 
Table 2. Inventory levels across the supply chain in US Dollars and Q4 change (source: Credit Suisse Equity Research Semiconductors (Sector Review: January 4Q08 Inventory Analysis 06 February 2009, p.11).

Book-to-Bill ratios
Another important variable to gauge the health of the supply chain in terms of product viability and ability to both weather the present storm and rebound quickly upon recovery is the Book-to-Bill ratio.  This number, provided monthly by SEMI, “is the ratio of the orders taken in a period to the amount invoiced over the same period.[…]  A book to bill [sic] ratio of one shows stability, more than one indicates growth and less than one indicates decline.  However, this is true only after correcting for seasonal variations.” (http://moneyterms.co.uk/bookbill). 

According to SEMI, the North American-based semiconductor equipment manufacturers’ Book-to-Bill ratio had averaged 0.86 from August 2008 through December 2008, with November and December’s ratios at 0.97 and 0.93, respectively.  However, at the end of February, SEMI reported that January’s Book-to-Bill ratio had fallen steeply to 0.48.  “Sales of semiconductor manufacturing equipment continue to decline, exacerbated by the diminished demand for consumer electronics, and the global economic turmoil. […]  As a result, bookings are at the lowest levels since 1991,” according to Stanley T. Myers, president and CEO of SEMI, as reported by DigiTimes 20 February 2009. 

Because of the sensitivity of Book-to-Bill data to seasonality, a three month moving average (3MMA) is important to contextualize individual data points.  The bookings figures for January 2009 year-over-year (y/y) fell by 75% and the billings figure was down by 54% for the same y/y period.  Obviously, these are significant numbers and underscore the dramatic contraction in demand present in today’s global marketplace.

Figure 3.  SEMI’s Book-to-Bill ratios for N. America (sources: compiled from SEMI.org and  DigiTimes February 2009)

It is important to continue to contextualize all of the data being considered.  Any single variable or data point can seem alarming in isolation, but by puzzling the data together, a more rounded picture of the trends in the semiconductor industry emerges and we can better understand the importance, or the weighting, of any given data.

Utilization, unit volume and ASPs
By looking at fab utilization levels, the units and/or volume within the semiconductor supply chain, and ASPs, a better contextualization of inventory levels plus Book-to-Bill ratios is achieved.  As discussed throughout the Fall issue of MarketWatch Quarterly Vol. 2:4, capital expenditures (CAPEX), also known as (re-)investment levels, were showing clear downtrends throughout last year (Y08).  This early indicator not only has ramifications to the structure of the entire industry’s balance of power, but can also be seen as a positive strategic step in having prepared for the present negative economic climate.  The fabs’ strategies of reducing CAPEX and cutting utilization rates early not only reduced unit volume (thereby aiding the reduction of inventory), but also helped, in part, to boost ASP levels by easing supply and therewith increasing demand (cf. “Will reworked balance sheets rebalance the power in the semiconductor supply chain?” in MarketWatch Quarterly Vol. 2:4).

According to a late February report by SEMI, “for 300mm fabs alone, spending will decline by about 58% to below the $10B – the lowest spending level over the past six years.” (www.semi.org/en/MarketInfo/ctr_028612?id=sguna309)  Furthermore, as presented in a recent article by Mark Osborne, Editor of FabTech:

The closure of some 200mm fabs, many in the memory sector but not exclusive to the sector, coupled to still decent fab utilization in 300mm facilities but little capital spending planned in 2009 could see inventory levels much lower. Therefore, if this tightening of supply kept going, it could produce a recovery of sorts. (http://www.fabtech.org/lib/printable/3511)

Figure 4.  SEMI, Total spending on major fab projects (source: www.semi.org/en/MarketInfo/ctr_028612?id=sguna309)

The retrenchment of CAPEX is set to continue through Y2009, though, strategically, not at the expense of new and ongoing research and development (R&D) projects (e.g., Intel’s US$7B investment www.intel.com/pressroom/archive/releases/20090210corp.htm;  TSMC/Intel Atom-core SoC production www.gartner.com/resources/166100/166179/intels_initiative_with_tsmc__166179.pdf; Hon Hai’s investment in the biomedical sector www.taipeitimes.com/News/biz/archives/2009/03/06/2003437756; among many others).  After all, it is critical for all companies to use this demand-sparse cycle time to prepare for the next demand-rich cycle with appropriately desirable, technologically advanced, and market-ready products.

As stated above, in addition to CAPEX reductions, utilization levels were notably scaled back during 3Q08, with many reducing utilization rates by at least half, and some, such as Chartered Semiconductor, dropping by 85%.  “Utilization rates in 4Q08 for foundries are expected to reach the lowest levels in years. […]  We expect utilization rates to remain low through first half 2009.” (http://www.solid-state.com/display_article/349092/5/none/none/TCHNE/Fab-spending,-capacity-in-2009:-The-wild-ride's-not-over-yet).  Table 7, below, presents the data compiled by SEMI, and republished by Solid State Technology (ibid.) representing the four decreasing forecasts for spending on equipping fabs as the economic situation deteriorated during 4Q08.

 
Figure 5.  SEMI, Total spending equipping fabs (source: http://www.solid-state.com/display_article/349092/5/none/none/TCHNE/Fab-spending,-capacity-in-2009:-The-wild-ride's-not-over-yet)

Notably, Table 7 does add to the positive data for market rebound after 1Q09.  As of Dec. 16, 2008, the forecasts show increasing CAPEX investments which will also translate into future increased utilization rates.  One cautionary note is resounding across analysts though, while it will be necessary to both increase CAPEX and utilization rates, as a more healthy demand cycle is anticipated by or during 2010, will the entire supply chain, including these fabs, be able to show enough restraint to restrict volumes so that inventory gluts and falling ASPs do not become the norm by 2013?

Figure 6.  SEMI, Fab forecast for capacity by product type by quarter (source: www.semi.org/en/MarketInfo/ctr_028612?id=sguna309).

“The data suggest spending levels could begin [to] improve by double-digit quarter-over-quarter by year end following the sharp decline the industry is currently experiencing.  The unknown is what level growth could reach in 2010.” (www.semi.org/en/MarketInfo/ctr_028612?id=sguna309)

More detailed discussion pertaining to specific commodities (i.e., ‘Product Type’) can be found in this issue of MarketWatch Quarterly Vol. 3:1, “2009 Open Market Component Outlook.”  A closer examination of the various companies and sector implications across the semiconductor supply chain can be found in this issue of MarketWatch Quarterly Vol. 3:1, “The Supply Chain is Ground Zero: The remaking of the Semiconductor Industry”

Market and revenue data: Demand trend analysis
The more sparse data sets are those revealing demand trends since there is so little demand presently.  If we consider the demand side aspects of the above unit volume and ASP data, combined with revenue data, an important bridge between supply and demand data can be made:

According to data complied by WSTS [World Semiconductor Trade Statistics], semiconductor industry revenue was [US] $13.2bn in January, -17.2% m/m (-31.2% y/y).  The January m/m revenue decrease was driven by declining units (-14.1% m/m) and ASPs (-3.6% m/m).  Normal seasonal averages for January month are for revenues -14.3% m/m on seasonal unit declines of -8.7% m/m, and ASP decline of -6.6% m/m. (Credit Suisse Equity Research, Semiconductors, January 2009 SIA Data, p.3)

Table 3.  Revenues for the total semiconductor industry on a  single month basis  (source: Credit Suisse Equity Research, Semiconductors, January 2009 SIA Data, p.3)

The findings from the January 2009 SIA and WSTS data underscore the weakness of January and identify that weakness as below normal with seasonality considered (including historical consideration of the impact of an early Chinese New Year, such as was the case this year).  Furthermore, on a three month moving average (3MMA) the revenue declines seen across the semiconductor industry, with some sectors obviously more severely depressed than others, is driven by units as opposed to ASPs (cf. Table 1, above) (Credit Suisse Equity Research, Semiconductors, January 2009 SIA Data, p.1).

Using these data to forecast outward, we can feel more secure in the numbers, noting that these are also more conservative than what may be found among some industry analysts.  However, these data, presented in Table 4, below, by the WSTS, are depressed because “due to the present worldwide economic situation it was also necessary to decrease the future expectations.” (www.wsts.org/plain/pdfs/generate/no/content%7Cview%7Cfull%7C3932/3592f6ea68c427360deaeffbfd5c96b8) 

Table 4.  WSTS forecast summary by region and commodity  (source: WSTS, http://www.wsts.org/public/popups/nr-200811.htm).

Figure 7, below, presents a historical trajectory of the WSTS data for worldwide semiconductor revenues in actual US$ billion and as a year-over-year (y/y) percent change.  Unfortunately, these data only cover through October 2008, but the historical peaks and troughs provide important comparisons for understanding the present economic downturn.

 
Figure 7.  WSTS, Worldwide Semiconductor Revenues y/y  (source: www.fabtech.org/lib/printable/3485)

“Worldwide semiconductor sales in January, historically a relatively weak month for the industry, reflected a continuing erosion of consumer confidence and the effects of the global economic recession,” said SIA President George Scalise. “Sales declined across the entire range of semiconductor products, as sales of important demand drivers such as personal computers, cell phones, automobiles and consumer items remained under pressure.”  (www.fabtech.org/lib/printable/3485)

Refocus for the rebound: Understand and realistically support demand
The global economic recession is now negatively affecting all commodities and product types due to sparse demand from consumers and businesses.  Even the PC sector experienced a roughly -9% slide for the fourth quarter of 2008 (4Q08); the one sector that had seemed relatively immune to the economic fallout, until recently.  However, while desktops were losing traction in the market place, notebooks and new, smaller and cheaper netbooks were gaining. Yes, gaining!  According to iSuppli Corporation, “Notebook PC unit shipments rose 35% last year [2008], up from 30% the prior year [2007].”  (as reported in http://pcdandf.com/cms/cms/content/view/5909/95/) 

Debate is mounting as to the long-term profit margin impact of increased netbook offerings because of their low-cost range (sub-US$500 range), smaller screen sizes (10 inches or smaller), and propensity for non-leading edge chips.  However, there is a market opportunity for traditional notebook and PC companies who are now shipping netbooks to compete with smartphone OEMs (cf. the forecast of netbooks as a market driver in “The IC Landscape and Sector Implications during the Economic Downdraft” in MarketWatch Quarterly, Vol. 2:4).

Alongside the relative strength of notebook and netbook sales in today’s weak market, smartphones have also held on.  Although both subsectors are facing slight declines, they are clearly leaders in unit volume and revenue for the consumer electronics market.  One compelling reason to not dismiss these subsectors is the important market demand role they fulfill: the consumer wants to have “internet-centric, highly personalized mobile computers,” according to Andrew Kitson, Juniper Research, who “predicts that between 2008 and 2013, annual sales of smartphones will rise by 95% to more than 300 million.” (http://seekingalpha.com/article/124407-global-smartphones-to-hit-300-million-by-2013?source=email) 

Further confirmation of this mobile, social networking, evolved smartphone/netbook trend was also reported by iSuppli Corporation in July 2008 (http://www.isuppli.com/newsdetail.aspx?id=12998) and discussed in “Who Is in the Driver’s Seat?” in MarketWatch Quarterly Vol. 2:3, and more recently in an article reviewing the future of mobile technology in Computer World (http://www.computerworld.com/action/article.do?command=viewArticleBasic&articleId=9127152&source=NLT_AM).  As reported in the MarketWatch Quarterly Vol. 2:3 article:

The individual consumer is increasing connectivity along time and depth of use scales.  This means that consumers are demanding more access in terms of ability to remain on-line, be connected with others (‘always on’), and enjoy richer features and content manipulation capabilities.  The continued double digit growth and general strength of the PC and mobile device markets underscore the importance of the individual as the sustainable, long-term driver for semiconductor sales.

Other sectors showing promising growth in the near- and long-term for the semiconductor industry include MEMS and other electronic parts growth for automotive; home biotechnology products as well as increases in sales to the medical and biotechnology sectors; exponential growth in energy as a result of increased investments and government backing of alternative energy sources as well as smart grids and home smart metering technology. 

The remaining question is not whether or not the semiconductor industry will rebound, for it will, nor is there really much doubt that the global economy will also begin to improve by or during 2010.  The question is whether or not the electronics and semiconductor industries are able to refocus on consumer needs and desires and provide appropriate, exciting and affordable products rather than flooding markets with mass commodities that actually have shown to dilute revenue and unit growth over simple long-term periods.  Responsible invocation of Moore’s Law combined with quality products and strategic designs continue to be the hallmarks of successful companies today and those that will rebound rapidly and with certitude upon global economic recovery.

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