Inventory concerns prompt IC unit forecast tweak

by James Montgomery, news editor

July 29, 2010 – Over the past few weeks, industry watchers have been nudging up their forecasts to suggest at least 30% growth in semiconductor sales this year. Ahead of this pack has been IC Insights’ Bill McClean, who’s been optimistic for growth since last year. At a breakfast talk during SEMICON West he reiterated his 30% forecast (quarterly breakdown: 5% increase in 2Q10, 8% in 3Q, and 1% in 4Q) — but he also suggested a likelihood of surpassing that 30% with a stronger second-half performance (quarterly breakdown: 5% growth in 2Q10, 13% in 3Q, and 4% in 4Q). An unlikely pessimistic scenario suggested a dip in both 3Q (-3%) and 4Q (-10%), which would shrink 2010 growth down to 20%.

2009/2010 IC market growth rate quarterly scenarios.

But now McClean’s enthusiasm seems to have pulled back a tad. He tells SST that he’s lowered his outlook for quarterly IC unit growth to 7% in 3Q (vs. 8%) and a -4% decline in 4Q (vs. 1%). That’ll keep annual growth to 30% — still a stellar year, but slightly less optimistic than just a few weeks ago.

So what’s changed? In a word: oversupply. IC unit shipments appear to have overshot that 5% forecast for 2Q10, and some stockpiles have accumulated. "We believe there is some inventory being built up in the industry right now, especially in the application specific analog and logic segments," he tells SST. One culprit: analog ICs for cell phones were up 66% in May vs. a year ago, though in the same quarter cellphone unit sales rose only about 3% (to 303M units, roughly back to 2Q08 levels). The rise of smartphones helps soak up more chip usage, but "this type of IC unit volume increase should always raise some concern," he says. And the communications market is a good early-warning signal for inventory buildup and burnoff heading into 4Q10 and 1Q11, he points out.

2006-2010 quarterly cell phone shipments. (Source: IC Insights)

Another possible problem with IC supply is what he calls "inadvertent" inventory build. Following Apple’s iPad tablet PC introduction, no fewer than 15 companies plan to launch their own similar tablet computers — in 2H10 alone! And as is typical of a growth-market cattle call, all of them expect to capture 10% of the market (mathematically impossible of course), and they’re buying up ICs to support those aims, notably NAND flash memory and display drivers, McClean says. Once the peak holiday seasonal period is over, tablet suppliers may start to shake out, and orders for those devices "could drop significantly."

From a broader view, McClean says he is becoming more conservative as he sees IC unit volume shipments start to pull away from a long-term trendline of 9.5% unit volume growth — a line he characterizes as a rubber band held by two endpoints, and pays attention when it pulls above or below from that trend. In 1Q09 units sunk 10% below that trend line; "the worse it became, the more optimistic we were," he says. Now in 3Q10 he projects units to have snapped back above that trendline (12% higher), enough to be conversely worrisome. "The market appears a little bit overheated," he says. However, if seasonal demand for electronics keeps up strongly, there shouldn’t be excess inventory and any current buildup would be burned just to meet demand.

2000-2012 quarterly IC unit volume shipment trend.



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