Outlook 2006: Analysts maintain caution, optimism for semiconductor market growth

By James Montgomery, News Editor

Analysts surveyed by WaferNews generally see steadily improving growth for the semiconductor market for the next three years – and more muted cycles than the wild days of the past. Projections for chip sales in 2006 cluster in the mid single digits, although the optimists see as much as 17%-20% growth, thanks to a healthy world economy and plenty of hot consumer products.

“If we see continued caution, then 2006 will be OK,” said Richard Gordon, managing VP for Gartner Dataquest’s semiconductor research group, who projects about 7% growth in semiconductor sales in 2006, roughly the same pace as 2005. With fairly modest demand projections, “any early move to bring new capacity on line could cause market weakness,” Gordon warned. On the flip side, “if demand is stronger than forecast, then 2006 could be quite a good year.” Gartner Dataquest shares the prize for the most accurate 2005 forecast with VLSI Research, each coming within 1%-2% of what looks to be the actual growth rate for last year.

In-Stat principal analyst Jim McGregor also projects ~7% growth in 2006. Aside from general concerns about the costs of energy, housing, and raw materials, he sees heavy pricing pressure in 2006 offsetting a ~15% increase in unit volumes, with more 300mm/90nm-65nm capacity coming online.

Others are more bullish about the market. Jim Feldhan, president of Semico Research Corp., paints a rosier picture of 17.5% growth in 2006, noting that the semiconductor industry hasn’t maintained consecutive years of mild single-digit growth since 1991-1992, and that many factors significant then (economic recession, inventory problems, lack of solid growth drivers) are not a concern today.

Inventories are low after what seems to have been a good holiday selling season (at least for electronics), and will have to be replenished in early 2006, pointed out VLSI Research president Risto Puhakka. Chipmakers are profitable by and large, he added, and there are “really good demand drivers in flash, and even the workhorse microprocessors are doing quite well.”

Feldhan and Bill McClean, president of IC Insights, questioned how forecasters could possibly be bearish, with expectations of ~3.5% growth in worldwide GDP, continued high factory capacity utilization, low chip inventories, and growing markets. Both analysts expect to see a repeat of 2005: slight growth in 1Q, followed by a flat 2Q, and activity picking up in the second half of the year. Chipmakers are still holding capital investments to around 19%-20% of sales, even with utilization rates climbing to around 90% during a year with ~7% chip sales growth, noted McClean, who then asked, “What are you going to be at when things really pick up?”

Future Horizons chip analyst Malcolm Penn admits he’s once again “out on a limb,” expecting roughly 20% growth next year. “I think you’ll see some slowing in the first half of 2006 — but not that much — and the second half will be extremely strong, if capex stays strong the way it is,” he predicted. The traditional post-holiday slowness won’t materialize, he said, thanks to pent-up demand for the Xbox 360 game console, continued consumer demand for digital gadgets, and the ramp-up to Sony’s new PlayStation set to hit shelves in early 2Q06. The emergence of global markets further mutes the post-holiday ebb, added Semico’s Feldhan — the Chinese new year, for instance, means a rollover of demand into the first part of the year, consuming more inventory and as a result, improving visibility.

Most analysts see growth returning to double-digits in 2007, although Gartner Dataquest’s Gordon warns that a downturn in both DRAM and NAND flash could dampen semiconductor sales that year. Tightening supplies and then investment in additional manufacturing capacity will lead to the peak of the next upcycle in 2008, with growth seen by most to be in the low teens, followed by the next downcycle in 2009, with estimates ranging from -4% to +8% year-on-year growth. Semico’s Feldhan noted that the stronger-than expected semiconductor sales in 2005 — up nearly 9% in 3Q — could pull that downturn forward into the latter half of 2008.

While everyone agrees the industry won’t likely whipsaw into extreme peaks or troughs again any time soon, not everyone thinks this is because the industry has learned to manage its growth. VLSI’s forecast through 2010 holds within a steady range of ~4%-9%, Puhakka explained, because with maturing markets the only major growth driver is world GDP — and with this slower growth, “the classic cyclical model is most likely not going to work as we have historically known.”

On the other hand, IC Insights’ McClean agrees that the cycles are moderating, but he still sees big 23% growth again in 2008. “People get so conservative, nobody can imagine another good year,” McClean said. “There are still some 20% growth years out there.” Still, even 23% growth would be the lowest peak for any cycle to date.

In fact, chipmakers may prefer cyclical peaks and valleys to a steady but slow growth. “I saw some of the saddest faces I’ve ever seen” after the 6%-10% growth in 1989-1992, McClean recalled. “That’s four years of decent growth in other industries, but this one was crying ‘Uncle.'” — J.M., WaferNews


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