Why 2008 could be the next cyclical peak

by Phil LoPiccolo, Editor-in-Chief

After catching its breath in 2007, the semiconductor market is expected to explode in 2008, reaching the industry’s next cyclical peak growth rate of more than 20% and setting a new milestone of more than $300 billion in annual revenue, according to Bill McClean, president of IC Insights, speaking at the research firm’s recent seminar in Boston, MA.

Reviewing the past 31 years of the semiconductor market, McClean pointed out that there have been seven market peaks with growth rates in the mid-20% to mid 40% range, typically occurring every four years during election years, with the exception of 1995, which took place seven years after the previous peak and five years before the next one (see table above). He predicted that the trend will continue in 2008, as semiconductor revenues are expected to top $320 billion.

One signal that the market will peak again in 2008 is that gross domestic product (GDP) worldwide is expected to grow at a greater than 4% clip, as it did in other peak years (see figure below). “There has been a good correlation between global GDP growth and semiconductor industry growth, especially since the late ’80s,” said McClean, pointing to specific peak years in 2004 (GDP 4.6%, semiconductors 28%), 2000 (4.7% and 37%), 1995 (4.2% and 42%), and 1988 (4.7% and 38%).

And perhaps not coincidentally, all of these peaks in the semiconductor market (except 1995) have accompanied US Presidential elections, which often spark strong US and worldwide economic growth, and the next one should be no exception, McClean noted. He forecasts global GDP growth of 4.3% in 2008, “which will create an environment for high growth in the semi market.”

Another big growth driver will be China’s strong economy. China’s GDP has averaged better than 9.75% over the past five years, and that should continue through 2008 despite the PRC government’s efforts to reign it to 7.5%, said McClean. As host of the 2008 Summer Olympics in Beijing, China wants to “display a successful and high-growth economy to the rest of the world,” he noted, “so there will be a lot of infrastructure build up going on there.”

Several technology applications are also projected to stimulate semiconductor market growth in the 2008 timeframe. Microsoft’s newly released Vista operating system is expected to create semiconductor growth by spurring a PC upgrade cycle in late 2007 and throughout 2008, as many users may simply opt to buy new machines instead of upgrading existing ones, explained Brian Matas, VP of market research at IC Insights.

A February 2009 legally mandated deadline to switch from analog to digital TV in the US will also create demand for semiconductors in 2008, McClean pointed out, adding that the advent of an increasing amount of digital programming will lead to a surge in the sales of digital TVs, set-top boxes, and other devices, especially during the holiday selling season.

Another big growth driver in 2008 will be telecommunications. Much of the projected 33% surge in foundry sales in 2008 (the highest since 2004) will continue to be in cell phones, McClean predicted. In fact, one billion cell phones were shipped in 2006, and by the end of 2007 there will be three billion cell phone subscribers — better than one phone for every two people on the planet, he noted. Considering that most subscribers are on an upgrade cycle of two years or less, he said, “that’s an amazing platform for electronics.”

Other significant market drivers, according to IC Insights, include a long-term 10% growth in IC unit volume shipments, building on a record five years in a row of a double-digit (15%) compound annual growth rate (CAGR). Beyond that, McClean predicts there will be a steady rise in the percentage of semiconductor content in systems (from 22% in 2007 to 24.5% in 2011), and the possibility of increases in average selling prices (ASPs) for ICs.

According to IC Insights, 2008 is going to be a very good year for semiconductor manufacturing, with market growth rates reaching the next periodic industry peak. “Our estimate of at least 20% is the highest estimate of any analyst out there, yet we’re being conservative,” McClean asserted. “I’m not sure if everyone is being lulled to sleep by the single-digit dollar volume growth rates we’ve seen recently, but we’re seeing incredible demand right now. This should wake everybody up.” — P.L.


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