by Bob Haavind, Editorial Director, Solid State Technology

Jan. 13, 2009 – A much smaller group of industry leaders than usual (about 115) came to Half Moon Bay, CA, for SEMI’s annual Industry Strategy Symposium (ISS) expecting to hear a lot of gloomy forecasts in the midst of a global recession. But they held out hopes to hear not just advice on riding out a tough downturn, but also some upbeat forecasts on what may come afterwards.

Speakers all agreed this is a tough one, perhaps the worst since WWII, but their views on how long the slowdown will last and what lies beyond range from fairly rosy, to it’s going to be much worse than any of us are expecting.

“The current US recession is the deepest and maybe the longest in the post-WWII period,” stated opening speaker Naraman Behravesh, chief economist and EVP, Global Insight. It’s already in the 13th month — the longest one was 16 months — and he expects this recession to go 20 months or more before a recovery begins. Key economic figures show record drops in 4Q08 that should continue in 1Q09, and it remains to be seen if massive fiscal stimulus will work.

If the US response is “big, bold, and swift,” Behravesh sees GDP falling only 0.5%, rather than 1.5%, in 1Q09, but he is concerned that the response will be too timid globally, particularly in Europe. He suggested that while semiconductor markets grew 17% in the 2005-2008 period, he projects growth of only 1% over the coming three years (2009-2012). Capital spending for information technology (IT) should be down 7%-8% in 2009 in spite of all the talk about infrastructure spending in areas such as healthcare and WiFi. It would take a while for these programs to kick in, he believes, so the effects wouldn’t be seen until 2010-2011 — and so there could be no return to a boom before 2011.

Alternate scenarios for US real GDP growth. (Source: SEMI/ISS)

Yet, Behravesh did not paint a totally gloomy scenario. He cited four forces that will drive industrial recovery:

– The collapse in commodity prices, lowering costs.
– Huge financial rescue packages, which are already unjamming financial markets and relieving stress, back to the level before the collapse of Lehman Brothers.
– Declines in interest rates, with US mortgages now down to 5% and the Fed trying to get them down to 4.5%, which should trigger another round of refinancings.
– Rising global fiscal stimulus, especially in the UK and even in Germany.

What about the stock market, Ken Rygler, a consultant, asked? “Don’t expect it to come roaring back,” Behravesh replied. He believes it is seeking a bottom as the Dow dithers in the 8500-9500 range, but it may begin a gradual rise in the spring, ahead of the economy. “Don’t compare it to Japan, with zombie companies and banks hiding in bubbles,” he added. “We don’t have those kinds of zombies.”

So what should management be doing to ride out the downturn, asked Aart de Geus, CEO of Synopsys? Behravesh made three points:

– This too shall pass.
– The recovery may bring inflation.
– Don’t forget emerging markets. Some like China and Brazil may make comebacks, but maybe not Russia.

A rough recovery ride for autos, too

The ray of hope that there may be an economic revival around the corner, perhaps by 2010, was echoed by Ted Chu, director of global economic & industry analysis for General Motors. But he warned that there are still plenty of danger signs that he claimed could be long-lasting.

On the plus side, Chu pointed out that in a couple of years there may be a lot of pent-up demand. In 1982 GDP growth was -1.9%; in 1984, two years after the bottom fell out, GDP jumped 7%.

But he pointed out that things are different this time. Corporate bond spreads with treasuries are the largest ever. Market volatility is at record levels, and high volatility tends to last for an extended period, just as low volatility goes for extended times.

“While the US economy is in a recession, the auto economy is in a depression,” Chu commented. Global vehicle demand has now dropped 25%, he pointed out — “and the auto industry, like semiconductors, hates volatility.” Both have huge fixed investments, costly factories, and in auto’s case, high healthcare costs.

One of the warning signs Chu cited is consumer debt, which has run way above trend since 2000, and may also fall off a cliff. Chu observed that the economic crisis started with a bubble in real estate, which is commonly considered an investment. He pointed out that is really consumption, and the trend, driven by low interest rates, spread around the world — to the UK, Spain, and beyond.

“We should cut the real estate consumption, and put the money into real investment,” Chu suggested, such as infrastructure spending like roads, bridges, and energy, where there has been underinvestment.

He does expect a recovery starting in 2010, but not like the strong revival of 1984-1985. Still, he pointed out that a lot could be wrong that could upset this forecast. He cited a list of 10 dramatic events that could change the picture, put out by Saxo Bank: these include an Iranian revolution, oil dropping to $25/barrel, the S&P 500 dropping to 500, and more (see slide below).

(Source: SEMI/ISS)

The dollar will remain relatively strong as long as the financial crisis continues — Chu called it the “best-looking horse in the glue factory.” Afterwards, expect the dollar to go down again, but not to where the Euro was worth $1.60, he said.

While cautious, Chu did explain why he believes there will be a lot of pent-up demand for autos when the economy revives. US sales of about 10.5M vehicles/year falls short of his estimated 12.5M replacement demand. He said this wipes out about 2M vehicles/year, plus there are about 2M new drivers added each year. So when credit and confidence improve, assuming oil pricing stays low, there could be a recovery for the auto companies, which will also be helped by lower commodity prices. He said sales could go from 10.5M to 12.5M to 14M over the next couple of years.

For auto electronics, he sees the trend continuing for demand to be above that for vehicles as more chip-based features continue to be added. The growth of electronic systems, especially for safety, will be even bigger in emerging markets, Chu believes.

Chu also noted that digging out of the current hole will depend on growth. Labor productivity is only forecast to be 2.1% from 2005-2016, compared with 2.8% from 1998-2004, but better than the 1.5% spanning the previous 20 years (1978-1997). There has yet to be a clear emerging technology enabler to boost productivity, though.

Positive signs to watch

While toolmakers face a very tough year, Randy Bane, VP/chief economist for Applied Materials, cited several trends that could get fabs humming again.

“Getting connected is an investment for consumers, even if housing isn’t,” he quipped. He expects IP traffic to continue nearly doubling every two years, through 2012. He cited trends such as social networking and HD video, as well as the continued rise of the middle class globally. The information economy is another sustainable trend, he believes, with the pervasiveness of semiconductors and nanomanufacturing for a new era.

The biggest trend, he suggested, might be the push for “going green,” and this drive will continue right through the downturn. A major target, he said, will be data centers and server farms. Electricity consumption doubled from 2000-2006, and could double again in the next five years without technology improvement. He showed a chart suggesting that without new technology, these energy hogs could hit 130B kWh annually in five years, but with advanced energy-efficient systems this could be cut dramatically, to about 75B kWh.

Although he sees a drop in IC units sold in 2009, Bane believes there will need to be a correction above the traditional growth rate in 2010 and 2011. Also, he believes that low ASPs will accelerate the shuttering of 200mm fabs, with 200mm capacity dropping 45%-50% from 2007 to 2010. Bane, along with other speakers, said that memory manufacturers in particular will have to find a new structure to be viable, such as even more joint manufacturing ventures. Meanwhile, as fabs shut down, he noted that Applied’s refurbishment business was strong.

Longer-term, Bane sees solid-state drives (SSD) replacing many hard disks as there is a cost crossover for NAND flash in about 2012.

Let’s hope he’s wrong

While there were several jokes about calling the suicide hotline during the opening day’s proceedings, the final speaker painted such a doomsday picture that moderator Michael Wright, Advanced Inquiry Systems, followed by saying, “The suicide hotline is now open.”

David Townes of Needham & Co. believes that the accuracy of government statistics has been seriously compromised, and inflation is much worse than most people believe. His adjusted charts show US treasuries yielding -8% at their recent bottom, for example. Interest rates will have to rise dramatically in the next 2-3 years to compensate, and the massive stimulus packages will only make it worse, he believes. By 2011-2012, interest rates are likely to be upward of 16%, he predicted.

He said it took 10 years to clear out the impact of massive government intervention in the 1930s, because businessmen couldn’t make sound decisions and growth stalled.

The scary thing is, that at last years’ ISS Townes was proved correct in pointing out the trillions of dollars of excess in the financial system due to credit default swaps and other exotic financial instruments.

Let’s hope he’s wrong this time. — B.H.