Everybody’s Gone Home for Christmas

Let’s Hope They Eventually Come Back
By Jim Walker, Gartner/Dataquest
Even though we all like to hear “Merry Christmas” and “Happy New Year” during this holiday season, our worldwide financial meltdown has made it much less cheerful. The outlook for 2009 is very bleak for worldwide economies and, more specifically, the semiconductor industry. I would love to say that Gartner/Dataquest’s outlook for the industry in 2009 will be optimistic, but I can’t. But I don’t want to say that the second Great Depression within a century is upon us yet, either. However, it definitely time to tighten the belt and save for a rainy day.

Never before has the semiconductor industry experienced two negative growth years back-to-back. And, never before has the semiconductor industry witnessed such a sharp one quarter drop in demand and orders. The bad news just keep getting worse as companies warn investors that the financial crisis will have an unprecedented impact on fourth quarter 2008 and year 2009 sales and profits.

Gartner expects Q408 semiconductor sales to show a record quarter-on-quarter drop of 24%, well beyond the 20% record set in the second quarter of 2001. Our 2008 preliminary semiconductor market share results revealed that 2008 revenue declined over 4.4%, much worse than our 0.2% growth we had forecasted just a month previous. For 2009, the outlook has changed substantially as well. Our most-like scenario indicates a 16.3% decline in revenue for the semiconductor industry in 2009, with the trend to our downside risk scenario of a 24.7% decline appearing to be more possible as the days pass.

Some of the end-product market segments will fare better than others for 2009. PC unit growth will be down 5%, with netbooks and notebooks doing much better than desktops. Cell phone units will be lower by almost 10%. Consumer products will retrench over 15%, as all of us begin to do without.

Memory, specifically DRAM, will be in a precarious position for 2009 as well. This part of the industry has been down in the dumps for over 18 months and the losses by the various companies in the market are nearing the $12B mark. The market is very unstable, with some suppliers asking for government assistance while trying not to be forced into bankruptcy or mergers.

Capital spending will be cut across the board in 2009. Semiconductor manufacturers are currently experiencing global recession, plunging demand, excess inventories, a severe credit crunch, and bankruptcies (especially memory, as mentioned earlier). Companies are responding by cutting capital spending drastically to protect what is left. Cash flow management is paramount. The result will be capital spending declining by over 34% in 2009. More specifically, we believe that wafer fab equipment will decline -33% in 2009. In addition, packaging and assembly equipment will contract by over -28%, while the ATE market will fall for the third straight year at almost a -20%.

So, with all the bleak news, what can one do to keep the doors open and the operations going?

The global recession came at a time when the overall semiconductor and semiconductor equipment industries were already in a vulnerable position. The excess spending in memory sectors drove the overall financial performance of companies in those segments to record losses even before the grim reality of recession had set in.

As the global economic recession continues on its downward spiral, this will accelerate contraction in the overall semiconductor market. Semiconductor suppliers across all segments of the industry have begun to lower production rates and close fabs that are not cost effective. Companies are instituting mandatory multiple week shutdowns which will affect Q4 08 and Q1 09 production rates. Previously planned fabs are being postponed. What little capex remains is being selectively focused on new technology. As 2009 progresses, we will see consolidation in all sectors of the industry, whether it be devices, equipment or manufacturing services.

We recommend manufactures prepare for the worst. The industry is in the midst of what will be remembered later as the worst crises in its young history. The industry will emerge looking leaner and better prepared for a future of long-term slower growth. One thing will be certain: the quest for new and more advanced technology will continue, and more advanced manufacturing will lead the way out of the current doldrums into a period of profitability.

JIM WALKER, principle analyst, may be contacted at Gartner Inc., 251 River Oaks Parkway, San Jose, CA 95134; [email protected].


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