Analysts: Five-year forecast shatters historic trend

by Phil LoPiccolo, Editor-in-Chief

Several key IC market indicators are moving into alignment — perhaps like no other time in the history of the industry — setting the stage for double-digit market growth from 2007 through 2011, according to Bill McClean, president of IC Insights, speaking at the market research firm’s annual seminar last week in Boston, MA. In fact, the five-year outlook is so robust that he suggests the historic IC market trend line might be revised upward from a compound annual growth rate (CAGR) of 7.5% to 10% or more.

“The real story is not what’s is happening in 2007,” said McClean, noting that most analysts are forecasting IC market growth around the same 5%-12% range, “and companies are not going to change their business plans based on a couple of percentage points one way or the other.” Yet 2007 may prove to be a watershed year on several fronts — unit volume sales, semiconductor content in electronic systems, and average selling prices — that could add up to vigorous growth for the foreseeable future, he said.

One of the most significant trends to watch in 2007 will be in unit volume growth, McClean stressed. “For the first time ever, since we began tracking the data, the IC industry has had five years in a row of double-digit unit volume growth,” he said, with an average growth of 15% during that time (see figure, above). “There has never been another period like it, not even for four years,” he said, adding that IC Insights’ estimate calls for 10% unit growth to continue long-term.

Another key trend is the continued rise of semiconductor content in electronic systems, from a record-tying 21.6% set in 2006 (previously achieved in 1995) to an estimated 22% in 2007, and to 24.5% in 2011 (see figure below). McClean explained that peak years in semiconductor content have historically coincided with peak years in revenue (2004, 2000, and 1995) — but not in 2006, because the average selling price (ASP) for ICs was negative, whereas in prior peak years ASPs had increased.

However, ASPs should also improve, according to McClean, who noted that DRAM ASPs actually increased 18% last year. “In 2004, we had an industry-wide 10% increase in IC ASPs, and things haven’t changed so dramatically in two years that it can’t happen again,” he said. Moreover, he added, there’s always a little upward wiggle room for IC ASPs within the push-pull relationship between system manufacturers and IC producers. “When the system guy wins, pricing goes down; when the IC manufacturer wins, pricing goes up,” he said. “Last year, the IC producers won, and Dell, HP, and the big PC suppliers paid more for DRAM. Even so, their PC unit sales went up by 10%, so there’s room for increases in IC ASPs.”

History bears that out, too — from 1992-1995, IC ASPs increased 12%, 16%, 24%, and 24%, respectively, McClean noted. “If we look at electronic systems sales numbers during this time period, we see that they also grew substantially. Somehow the electronic system producer was able to absorb ASP increases for their components, and it didn’t hurt their sales one bit.”

Given the confluence of market forces, IC Insights is forecasting a 10% CAGR for worldwide IC revenues over the next five years, from about $211 billion in 2006 to $334 billion in 2011. This is significantly higher than the 7% growth trend from 1996 to 2006, he noted, and perhaps ushers in a new plateau of growth. “Do we have to redraw the trend line up to 10% or 11%? We may have to,” he said. “We may have reached a different level.”

Regarding future industry peaks, McClean acknowledged that many analysts think the industry will never grow more than 15% in any given year, but he is not one of them. Unit volume growth was better in 2006 than in the cyclical peak in 2004, and pricing can turn around, he pointed out. “If we can get an 18% increase in ASP for DRAM, we can get a 10% across-the-board increase in ASPs for ICs. Couple that with another 15% or 18% unit volume growth, and we’ve got better than 20% market growth,” he said. “At some point, I wouldn’t be surprised to see another 30% growth year for the industry.” — P.L.


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