by James Montgomery, News Editor

Analysts at a SEMI breakfast near Boston on June 7 generally agreed that the semiconductor industry is growing ahead of initial expectations this year, and that the future looks bright for the next couple of years with emerging applications taking center stage. However, recent surprises in MPU sales and soaring order levels have raised the specter of deja vu — that the industry could be heading into a repeat of 2004’s fast start and slow finish.

All participants have raised their industry forecasts from earlier this year, reflecting elevated levels of investments from chipmakers and high capacity utilization rates. Jim Feldhan, president of Semico Research Corp., sees semiconductor sales rising 17% this year, with the high capacity utilization rates driving capex investments, and not falling off until 2008. He noted that fab capacity utilization rates continue to hover near peak levels, and utilization at foundries is even higher (e.g., TSMC ~100%, SMIC ~97%), and should remain there through the rest of this year. Bob Johnson, research VP for Gartner Dataquest added that the capex tipping point used to be about 85%, but today is now in the 90% range.

Feldhan predicted that the mainstays of PCs (notebooks and desktops) and cell phones, which made up more than half (54%) of wafer demand last year, will take up barely a third of wafer demand by 2010, due to the emergence of areas including digital TV, set-top boxes, wireless networks, and various portable devices. He also issued a laundry list of applications in the automotive sector, spanning everything from the car engine to chassis (tire pressure sensors, collision avoidance) to interior usage (e.g., GPS, Bluetooth, and on-board multimedia) . Another emerging application is in fuel cells, which will enable true “lightweight” laptops — instead of current ones that start at ~4lbs, but are actually double that size once you add batteries, chargers, and other accessories, he noted.

Feldhan also suggested that the notion of China as a hotbed of activity for lower-end technologies, not leading-edge stuff, is incorrect. “They want what the West has,” he said, pointing out that visitors to some Chinese car dealerships are now greeted with wine tasting and espresso bars.

Johnson pointed out that the top four applications by 2010 — PCs, digital cellular, removable solid-state storage, and digital media players — will collectively see 46% CAGR from 2005-2010, and will represent 54% of Asia-Pacific demand by 2010. These applications are also the main drivers behind the huge investments being made in flash memory today, he noted. He showed projections that NAND flash production will likely top an astonishing 500 billion megabytes by the end of 2007 — about 100MB for every person on the planet — with the vast majority of capacity consolidated among Samsung, Toshiba and SanDisk (through their JV), and Hynix.

“Empty shell” fab capacity continues to decline as chipmakers fill out current facilities, and is likely to remain at historically low levels as additions are carefully managed and tied into financial performance, noted Johnson. However, such low “empty shell” capacity reduces the industry’s ability to respond to an unexpected surge in device demand.

Bill McClean, president of IC Insights, noted that IC unit volume shipments are likely to stay at a 9%-10% growth rate through the next 10 years, with semiconductor content in electronic systems increasing 24%-25% by 2010. Contending that the IC market has developed two different metrics for units and dollars, he presented a dual trendline showing that IC ASPs have held relatively flat at around $1.50 for the past three years, while unit volumes have soared from about 20 billion units to more than 32 billion units in 1Q06.

While generally optimistic about industry growth for at least the next two years, the presenters also agreed that warning signs are emerging in several sectors that should be followed closely.

All three of the panelists expressed “shock” at surprisingly weak April MPU sales. McClean pointed out they were only $1 billion, vs. $4.6 billion in March, and the lowest they’ve been in a decade. “If that number is true [pending possible WSTS revisions], watch out,” he said. He also pointed out that IC unit volumes are well above trendline for the third straight quarter and higher than 1Q04 inventories, drawing comparisons to 2004, in which the industry witnessed a good 1H and then a lousy 2H. He invoked the term “overheated,” and suggested there could be a correction “in the teens” coming in 2H06.

McClean also pointed out that Intel has reduced expectations to a 3% sales decline this year. After a poor 1H06, they’ll have to achieve back-to-back 15% growth in 3Q and 4Q — something the company has never done before — just to recover to that -3% level, he pointed out.

Pointing to “surprisingly strong” 1Q bookings, Gartner Dataquest’s Johnson agreed that “it looks like 2004 all over again.” He also suggested that bookings levels really don’t mean anything anymore — chipmakers place orders with all sorts of promises, but still cancel or push them out with pretty much no penalty (e.g., no up-front payments). Thus, he told the audience, the customers have all the power now, and it’s the equipment industry’s fault for letting them get away with this behavior.

Johnson voiced concerns of overspending, particularly in the memory segment, which is now projected to account for approximately 40% of total industry capex — but just 22% of industry revenues. He predicted that 2006 capex would fall short of announced spending this year by up to $1 billion, with the bulk of that most likely from the memory segment, and warned of a possible DRAM oversupply in 2H06 that would punish mainly second-tier companies that can’t switch over to flash capacity. He also pointed to a “fairly significant” increase in inventories in 1Q06, which although still below the “caution zone” should be watched. If inventories continue to rise in 2Q and 3Q, “look for semiconductor manufacturers to pull back and push out capacity expansions,” he predicted — yet again reminiscent of what happened in 2004.

The closing Q&A panel session generated animated discussion over the status of chipmaking in China, the foundry business model, and the impact of global factors including high oil and energy prices on chip sales. Johnson noted that in China, often a company suddenly makes headlines by announcing new fab plans…then time goes by, gradually nothing happens, and they fade away. (Indeed, reports in just the past week suggest that efforts to build a third chipmaking plant in Beijing have hit a snag due to concerns about a lack of funds.) While there has been some backend activity in China, that typically doesn’t require as much capital, he said. “China as the next Taiwan isn’t going to happen. The money isn’t there.”

Feldhan noted that views on China’s chip industry typically take a “Wall Street” perspective focusing on profits, and not the bigger strategic picture. “SMIC is heavy in memory, but is going down the learning curve,” and making money is a secondary goal, he noted. “They’re looking at 5-10 years down the road, not a quarterly result.” McClean noted that the top four foundries all are public entities, and can’t “spend whatever they want to,” which keeps capacity under control.

IC Insights’ McClean also reiterated his belief that “the foundry market is closed,” and that proposals for fabs in emerging regions like India and Dubai are best described as “dumb and dumber.” AMD, reportedly a big supporter of an India 300mm fab, now plans to spend $2.5 billion on its Dresden operations, and reportedly is being wooed to build a new facility in New York — both of which are moves that would cast doubt upon any India project, he said. He also suggested that Samsung may face difficulties as it ramps up its foundry business, saying that fabless companies will have to decide whether they can really trust the firm. He pointed out that Samsung threw its weight behind what it called its “PortalPlayer-killer” technology, and ultimately bumped out Portalplayer from Apple’s iPod design, which had represented 70% of that company’s business.

Regarding the increasing importance of consumers’ “discretionary spending” upon things including electronic devices, all the analysts agreed that gas prices have pinched consumers’ wallets, and that buying patterns have indeed changed. Feldhan noted a recent TV commercial for Chevy’s mammoth Tahoe SUV touted its best-in-class mileage performance, and that restaurants in California are seeing noticeably less business during the week. Johnson admitted being concerned about a dependence on consumer spending, noting that ultimately consumers will make choices: “buy new clothes, dinner, or an MP3 player.” — J.M.