Linx Consulting and Hilltop Economics – Outlook for 2016

We expect that semiconductor growth for 2015, on an area processed or million square inches (MSI) basis, will come in at about +4.0%. Weak growth in global investment in 2015 produced a modest inventory cycle in technology products at the end of 2015. The correction to that cycle will carry over into 2016, producing a weak MSI gain of +2.7%, as illustrated in the Economic Semiconductor Forecast below:

Global real GDP should grow a modest +2.4% in 2015, then improve to +2.9% for 2016. Recently, forecasts for Asia in 2016 have been downgraded. China’s official forecasts remain in the high 6% range, but a more realistic outlook might be in the 6% range. Outlooks for Japan, Taiwan and South Korea were also reduced in the face of the new global headwinds and the reduction in China.

Global real consumer spending is expected to grow 2.6% in 2015 and 3.3% in 2016. The outlook for steady growth in consumer-driven purchases of technology goods appears to remain in place on a global scale, despite being lowered in many key Asian economies, as the outlooks in most European economies and the U.S. have improved enough to offset declines in Asia. Global investment, another key semiconductor final demand driver, finishes 2015 at its weakest rate since the recession before improving slightly in 2016.

Weakness in these key semiconductor end-use market indicators was unanticipated earlier in 2015. Downstream inventory-shipment ratios indicate a mild inventory cycle has begun that will soften semiconductor output into the start of 2016, with sequential growth not turning positive until the second quarter of 2016. The second quarter rebound stems from the normal seasonal uptick as well as the improvement in final demand, especially investment, now anticipated to develop in the second half of 2016.

Linx Consulting recently introduced the Linx Materials Index (LMI) as a measure of the direct materials intensity of the wafers produced by the industry. The latest LMI forecast is shown below. Going into 2016, one major trend becomes apparent – the value of materials used to produce one square inch of silicon is rising. Since many devices use a static bill-of-materials, this increase is primarily driven by leading edge devices.

The LMI is forecast to grow significantly in the next 2 years. This growth is driven to a great extent by the increased lithography materials cost associated with scaling into 14 and 10 nm. In addition, the cost to serve leading-edge customers is also increasing with the need for more sophisticated quality systems and lowered variations in materials supplied. Over the last year, we have seen trends indicating the pace of chemicals supplier M&A activity may increase to match that of the OEMs and device producers. We expect this trend to continue and gain a larger foothold in 2016.

Insights for this article were contributed by Hilltop Economics and Linx Consulting.