Analysis roundup: Stinky economy, souring forecasts

by Pete Singer, Editor-in-Chief, Solid State Technology
by James Montgomery, News Editor, Solid State Technology

Nov. 25, 2008 – The extent of the financial crisis is still unknown, of course, and most agree that it will get worse before it gets better. We’ve been gathering reports from leading market forecasters and analysts and can share what they’re telling us — and it looks like some rough sailing ahead for semiconductors.

The good news is that market fundamentals are quite different than they were in 2001. “Staring a global economic recession in the face, will 2009 be a re-run of 2001? We think no,” said Malcolm Penn, CEO of Future Horizons (Kent, UK). Downturns in the semiconductor industry over the last 60 years were always caused by excess capacity, he points out, triggered either by demand or supply side issues — e.g., by overinvestment (making capacity overshoot demand) or a demand slowdown, whether through an inventory burn or recession (making short-term capacity exceed near-term demand). Penn notes that the 2001 slowdown was unique in that it was triggered by both demand and supply-side issues: the collapse of dot-com inflated demand euphoria, a 9/11-driven economic slowdown, and a resultant massive inventory burn just as a huge amount of excess capacity was coming onstream. Entering 2009, he compares, we have no serious overcapacity in place (pre-slowdown utilization rates were ~90%, capex cutbacks started 12-18 months ago, and IC ASPs are in the middle of a cyclical upward trend. Moreover, IC units have been running at or below the 10%/year long-term trend line with no serious inventory overhangs. “For once, the industry is in structurally good shape to enter a recession,” Penn writes, and “this will make the 2009 downturn statistically shorter than it would otherwise have been.”

Chip market downturns, triggered by excess capacity (demand or supply side). (Source: Future Horizons).

Bill McClean, president of IC Insights (Scottsdale, AZ), believes the effect of a global recession on the worldwide semiconductor market in 2009 depends greatly on the magnitude and duration of the recession. A severe US recession coupled with a steep global recession (which he defines as <2.0% worldwide GDP growth) "would probably cause the worldwide semiconductor market to show a 10% decline." He further expects worldwide semiconductor industry capital spending to decline 15% in 2009 after falling 24% in 2008, and even with these spending cutbacks IC ASPs should fall another 6% in 2009, the same as the decline forecast for 2008. McClean projects that the steep spending declines, and a capital spending vs. sales ratio "that is likely to reach an all-time low (15%) in 2009," will cause IC ASPs to rebound -- "very strongly for DRAM and NAND flash memory" -- and "spur double-digit semiconductor industry market growth in 2010, 2011, and 2012."

SIA president George Scalise also echoed that the current situation is nothing like the 2000-2001 downturn; the consumer is now the primary driving force, emerging economies are now a very significant part of demand (and will become even larger as populations grow), and there’s no inventory overhang. Today, he said, the supply chain “appears to be in very good balance,” with maybe some “modest adjustments” needed but still within the range of most normal periods. “Everyone [in the supply chain] is capable of moving quickly, monitoring what real demand is and responding to that,” he said during the SIA’s recent Webcast (Nov. 19). Still, Scalise agrees that 2009 looks “problematic,” with key demand drivers experiencing slowdowns, and a return to growth not expected until 2010-2011. “We need to restore consumer confidence to believe in buying,” he said, noting the feds are trying hard to do this. Only when the credit crisis eases and the infrastructure repaired, will we begin to see normal business patterns again.

Taking its cue from the latest WSTS numbers, the SIA says 4Q will be negative, with 1Q09 following the normal seasonal pattern (i.e., a sequential decline). Indicating the impact of a slowing economy, the SIA has slashed its expectations for the big drivers of consumer chip demand: PCs (shipments -5% in 2009) and cell phones (-6.4%). The lion’s share of sales for PCs (50%) and cell phones (70%) are into the developing world, he pointed out, with adoption similar to traditional consumer products demand in other regions but at a slower rate. Looking further out, the SIA expects a -5.6% decline in chip sales in 2009 to $246.7B, followed by 7.4% growth in 2010 ($264.9B) and another 7.5% in 2011 (to $284.7B).

Industry revenue growth forecast. (Source: SIA).

iSuppli’s Dale Ford, SVP of market intelligence services, now pegs global semiconductor revenue to decrease 2% in 2008 (vs. growth of 3.5%) — the first decline for the chip industry since 2001. Growth in 3Q vs. 2Q that was supposed to be ~7.9% turned into “a very anemic 2.5%,” he says. And 4Q looks set to plunge about 9% Q-Q and 11% Y-Y, or maybe even more as numerous semiconductor suppliers keep lowering their forecasts. “In discussions with semiconductor suppliers, equipment OEMs and contract manufacturers, a story of fear and great uncertainty has emerged,” he writes, evidenced by “dramatic declines in consumer and industrial markets,” with orders not just slowing but stopping entirely and cancelled. “It is now clear that the semiconductor industry is already in decline,” he writes, “and the remaining questions are how deep and how long this decline will extend in 2009 and possibly 2010.”

Despite all the negative sentiments about the economy, Aida Jebens, senior economist at VLSI Research (Santa Clara, CA), does not believe electronics sales will be in negative territory next year, for several reasons. “With the exception of 2000-2001, there has never been a case in history when an economic slowdown or recession resulted in a drop in electronics sales,” she notes. The 2000-2001 period was driven by the Y2K tech boom, she says, and was made worse by the terrorist attacks, but “we do not have the same situation today — we simply have a very nervous sentiment because of the economy.” And electronics, she points out, typically do well in a slow economy. Consumers tend to cocoon in their homes when times are tough, choosing to buy electronics instead of going away on vacation or going out for entertainment. And though we should expect a pullback in corporate spending on high-end servers, “even in recessions, businesses tend to buy computers and peripherals, and networking hardware to improve efficiency and boost productivity,” she points out. VLSI expects both consumer and business spending to stagnate in 2009, resulting in a very slight 3.5% growth in electronics.

Klaus Rinnen, managing VP at Gartner, says that after ~2% semiconductor growth in 2008, in 2009 the market could experience anything between a slight decline (-2%) to slight growth (+1%). Gartner also expects a ~17% decline in capital spending next year, and an ~18% drop in capital equipment sales. Rinnen sees an “excess condition” for all of 2008, with rising inventories in 4Q overshadowing demand and reducing production needs for 1H09, which will lead to reduced factory utilization. And the memory sector continues to suffer, he notes. “Continued weakness in memory sectors combined with reduced production due to increased inventory levels are causing many manufacturers to drop spending projections. Memory financials continue to worsen, causing suppliers with cash flow problems to delay or eliminate capacity expansions. Some vendors are even postponing investments for needed technology improvements because of profitability problems.”

Revised industry revenue growth forecast, as of Nov. 15. (Source: Gartner).

That all said, one forecaster told SST that trying to figure out what will happen in 2009 is “like starting into a black hole.” Everyone’s models used to forecast are of course based on underlying assumptions tied to historical data — but there is no precedent for what we are now experiencing, so the models don’t work. And that means it’s really anybody’s guess what to expect. — P.S., J.M.


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