October 13, 2006 – Citing steady momentum for computers and mobile devices, minor and temporary effects from higher energy prices, and no signs (yet) of impact from rising inventories, iSuppli Corp. has reaffirmed its forecast for global chip sales this year.

The firm projects a 7.8% year-on-year increase in chip sales to $255.7 billion, virtually unchanged from the 7.9% growth it projected back in July. While maintaining the course for 2006, iSuppli has slightly reduced its outlook for 2007 chip sales — 10% growth, instead of 12.4% growth, although still calling it the peak of the present market cycle. Chip sales growth will begin slowing to 8.8% in 2008, and 2.6% growth in 2009, the firm noted.

Slight tweaks to the forecast are visible at a granular level — e.g., slowing PC demand has caused iSuppli to trim its outlook for the data-processing segment to 7.3% from 9.3%, but strong mobile-phone demand will lead to 5.2% annual growth for the wireless communications segment, vs. initial projections of 4.6%. “Both the PC and mobile-phone areas are maintaining their momentum in 2006, keeping semiconductor shipments at a higher level than they were during the second half of 2005,” said Gary Grandbois, principal analyst with iSuppli, in a statement.

By far the biggest changes are in iSuppli’s outlook for the memory segment, DRAM and NAND flash. The freefall in DRAM ASPs have slowed down in 2006, down only 16% vs. 40% a year ago, and thus DRAM revenues are seen stronger than expected at 24% year-on-year, vs. just 8% projected back in July. But for the high-flying NAND flash segment, ASPs have taken a nosedive — down 60% — causing sales to rise 17% instead of the robust 37.2% previously forecasted.

Higher energy prices from early in the year finally trickled down to the semiconductor market, briefly stunting growth in chip sales, according to the report. Semiconductor revenues in 2H06 are seen increasing 6.7% vs. 1H06, the lowest rate of second-half growth since 2001 and less than the average 8% sequential growth for the last six months of the year. However, oil prices have bottomed out in recent weeks, mitigating the impact on consumer spending and quieting concerns of a possible US economic recession, and the outlook for 4Q looks much better, iSuppli noted.

Concerns over excess inventory continue have been based in no small part to collective memory of the inventory build (and painful burnoff) in 2004, but there are some important differences, iSuppli noted. In 2004, the dramatic rise in surplus chip stockpiles was broad-based, and so was the resulting pattern of customer shipment returns and order cancellations when second-half demand failed to materialize. Today, most of the inventory excess is being caused by price wars and new product launches in microprocessors and PC core logic chipsets, with most of the surplus concentrated at Intel.

iSuppli acknowledged that there are some signs that rising inventory levels are popping up in other segments of the electronics industry, but “there are few indications that it is having a significant impact on chip sales,” iSuppli stated.

One area of concern might be consumer electronics, which is seen softening to just a 3% increase vs. 13% growth a year ago, mainly because the hottest consumer devices “have settled into a stage of declining ASPs and slowing growth,” iSuppli stated. Therefore, iSuppli has revised its outlook for electronic equipment revenue to 5.1% growth in 2006, vs. a previous forecast of 6.8%, and “a significant decline” from 8% growth in 2005.

Worldwide semiconductor revenue and annual revenue growth forecast

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