AFI: Bad forecasts come from human nature

By Debra Vogler

WaferNews Technical Editor

What would happen if equipment suppliers got together and decided that they would all charge cancellation fees when customers cancel orders – and hold fast to collection?

Well, as Advanced Forecasting President Moshe Handelsman notes, they would likely be declared an illegal cartel.

And if a supplier tried to do this maneuver unilaterally, it would probably lose customers to others more willing to forgive and forget fallout from unrealistic forecasting. Speaking recently at the Association of Vacuum Equipment Manufacturers International (AVEM) fall seminar, Handelsman relayed a humorous but practical way of looking at the double- and triple-booking phenomenon: “If you order too many chairs from a furniture store and decide you don’t need them after all, will the store tell you it’s OK, we’ll just sit on them?

“Since 1984, there have been nine major turning points in the IC industry. Costly mistakes occur when decision makers are unaware of a turning point, misled by their clients and forecasters. What can be done is to educate suppliers regarding the issue of double-bookings.”

Unfortunately, he thinks the education process could take years.

Handelsman places the root cause for either too much optimism or pessimism on human nature. Citing U.C. Berkeley and Stanford U. studies, Handelsman comments that, “Academic research has shown that human beings perform forecasting through extrapolation.” “If you ask someone to predict the future, their answer depends on what point in the cycle they are asked. When allocations are based on extrapolations and the industry has no standard practice of penalizing customers for such overbookings, the results are overcapacity, bloated inventories, and recession.”

Asked to comment on the growing commoditization of the chip industry that is starting to encroach on the equipment business, Handelsman notes that product and service differentiation among suppliers probably isn’t the answer. “The boom-bust problem is not related to the technology but to exaggerated forecasts put out by humans.”

Looking ahead, Handelsman believes that the terrorist attack on the World Trade Center will result, for a time, in the freezing of the worldwide economy at its current level and direction (down). The stagnation time period will be a function of the media coverage, e.g., how much the population watches the news purveyors and is affected by the constant barrage of doom and gloom news. However, he predicts a shallow recovery in mid-2002. “The industry is currently going so far down below the theoretical demand for ICs – due to the overheating in 2000 – that, even though the theoretical underlying demand for ICs will decline in mid-2002, there will be a slow recovery in actual IC sales,” states Handelsman. “Thus, AFI is more optimistic about 2002 than other forecasters.”

Indeed, in a recent AFI report, the firm reaffirmed its forecast that IC revenues would reach a bottom in the fourth quarter of this year. Recent data points in AFI’s forecast models are encouraging, according to David Crume, director of marketing and sales at AFI.

“For most of 2001, our IC Recovery Index depicted a severe and rapid decline in IC sales. But recently, data points from our IC Recovery Index, Wafer Shipments and DRAM ASP forecasts have shown a much slower rate of descent,” he reported. “The position of these data points signals an approaching minimum point and some encouraging news for many companies, especially the hard-hit DRAM manufacturers.”


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