‘Soft landing’ could make 2005 a watershed year

By J. Robert Lineback, Senior Technical Editor

For years, chip industry pundits and managers have talked about the need for “soft landings” in semiconductor downturns to help smooth out the disruptive effects of boom/bust cycles, which have driven and derailed market growth for decades. Based on 1Q05 data released May 2, the semiconductor industry may be witnessing a bona fide soft landing after chip revenues reached record levels in 2H04.

With excess chip inventories nearly gone and demand holding surprisingly steady into the slowdown, most chip analysts see no major problems brewing. The only significant rough spots appear to be a current weakness in silicon foundry sales and a DRAM glut by 2006.

For the first time in history, worldwide semiconductor sales in March exceeded $20 billion, growing 19.4% from February’s $17.3 billion, based on the final 1Q numbers released by the World Semiconductor Trade Statistics (WSTS) organization. March’s $20.6 billion was the chip industry’s fourth highest monthly sales total ever, bringing 1Q revenue to $55.3 billion — a 0.4% sequential increase over $55.1 billion in 4Q04 and 13.1% above $48.9 billion in the same quarter a year ago.

“I would call this moderately strong growth for this time of the year,” said George Scalise, president of the San Jose, CA-based Semiconductor Industry Association (SIA), during a conference call after releasing the WSTS data. The SIA, along with many industry analysts, currently is forecasting nearly flat sales growth in 2005 after revenues hit a record $213 billion in 2004. Scalise cited better-than-expected unit growth in PCs (11%), cell phones (15%), and digital cameras (12%) during 1Q, which could result in an upgraded 2005 forecast to “a bit better than flat” when the trade group issues its midyear outlook on June 8.

Other industry forecasters continue to mull over their current projections, with the likelihood that some 2005 growth estimates might be raised slightly. But perhaps more important, none of the analysts contacted by WaferNews said they were discouraged. “March was a little better than we thought. It wasn’t a screaming month, but it was good,” reflected analyst Jim Feldhan, president of Semico Research Corp. in Phoenix, AZ. Feldhan’s outlook calls for a 3.4% decline in chip sales this year, but he now believes the upside could be “just under 1% growth.”

On the heels of 28% semiconductor growth in 2004 and 18.3% in 2003, a flat year in 2005 would definitely qualify as a soft landing in comparison with other slowdown years, say analysts. “There isn’t anything to worry about at the moment,” assured chip analyst Richard Gordon, VP of research at Gartner Inc.’s Dataquest unit in Boston, which is maintaining its forecast of 3%-5% growth in 2005 until it sees 2Q data. “The more interesting year is 2006 — forecasts are all over the map. We’re calling for a fairly flat year in 2006, but it could go either way, honestly,” Gordon told WaferNews, citing a potential glut in DRAMs, high oil prices, and economic issues as “wild cards” in the forecasting deck.

One other segment to keep an eye on this year is the normally high-flying pure-play silicon foundry business, which has taken the current slowdown on the chin. The foundry segment was running wafer fabs at about 70% capacity utilization in 1Q05, according to Scalise, while integrated device manufacturers (IDM) were at about 85% after slipping from above 90% in 4Q04. Also, a new report from iSuppli Corp., El Segundo, CA, predicts that pure-play foundry suppliers will lag overall semiconductor growth for the first time ever in 2005, partly due to a terrible start in 1Q. “I think the foundry market will eventually continue to outperform the semiconductor industry in the future, but this segment faces mitigating circumstances associated with 2005 that have never happened before,” explained iSuppli analyst Len Jelinek. “IDMs came out of 2001 pursuing ‘asset light’ strategies, but as the market heated up in 2004, they started adding internal capacity. This time they are not so pessimistic about the months ahead,” he added.

Overall, the IC industry still is coming to grips with major changes that began 10 years ago, after “build-to-plan” strategies shifted to “build-to-order” following the PC industry’s “Windows 95 bubble,” said A.A. (Tad) LaFountain, analyst at Wells Fargo Securities in New York. “Everyone talks about the ‘Tech Bubble’ of 2000-2001, but this goes back to 1995,” LaFountain told WaferNews. “That’s when Michael Dell [of PC giant Dell Inc.] took everyone to school and questioned why anyone would want to hold inventory one minute longer than necessary.” From that came the move to contract manufacturing and build-to-order strategies, which keep inventories razor thin.

“All of the double and triple ordering [to fill inventories] now occurs at the front of the cycle, not at the end. This and other factors have permanently changed the semiconductor industry to more frequent cycles but at lower amplitude [boom/bust periods]. I don’t think we’ll see 1995 and 2000 again,” added LaFountain, implying there also won’t be severe downturns following the boom years. — J.R.L.


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