The Forecast for 2012: It's all about GDP

01/10/2012

Correlation between worldwide economic growth and semiconductor market growth in 2012 will be very strong. That, plus supply side factors, will likely mean slow single digit growth in semiconductor sales for 2012 and reduced capital spending on new capacity. The good news is the demand for more connectivity or simply even more "cool" products seems relentless. Here, we provide the outlook from three leading analysts:

Very strong correlation between worldwide economic growth, semi market growth

Bill McClean, President, IC Insights, Scottsdale, AZ USA

When the global recession intensified in late 2008 and early 2009, almost every country/government in the world responded with some level of stimulus funding in an attempt to help re-start economic growth. In total, about $2.2 trillion dollars were injected into the worldwide economy from late 2008 through early 2011.

Stimulus spending was an important component with regard to worldwide GDP growth in 2009, 2010, and early 2011. In fact, without the boost from stimulus spending, worldwide GDP growth would have been below the global recession threshold of 2.5% in 2008, 2009, and 2010, and would have created an unprecedented global recession for three years in a row!

Almost all of the $2.2 trillion in stimulus spending came to an end in the first half of 2011. In the second half of 2011, the beneficial effects of the stimulus began to fade and the world had to come to grips with a new reality. Across the globe, stimulus spending has not just been allowed to end, it has turned into austerity. The mantra emanating from governments in most developed countries is now one of steep budget cuts, which, at least over the next few years, will act as a drag on worldwide economic growth.

In 2011, worldwide GDP growth was 3.3% and IC Insights forecasts that 2012 worldwide GDP growth will be only slightly better at 3.5%. With the long-term average worldwide GDP growth rate being 3.6%, the forecast for 2012 is slightly below average.

The primary reason for the continuation of below average worldwide GDP growth in 2012 is weak GDP increases forecast for the developed countries
egions. Although an increase from the 1.4% growth rate logged in 2011, in total, the GDP growth rate in the developed countries
egions is forecast to be only 1.8% in 2012. In contrast, the emerging markets GDP growth rate, which includes China and India, is expected to register a 2012 increase of 6.2%.

Since 1984, the correlation between global economic growth and semiconductor industry growth has been relatively good. In some cases, when the semiconductor industry and worldwide economic trends are moving in opposite directions, the semiconductor industry may be encountering an inventory adjustment period (e.g., 1985), significant overcapacity (e.g., 1996 and 1997), or significant under-capacity (e.g., 1993). From 1998 through 2011, the semiconductor industry has roughly paralleled the state of global economic conditions.

IC Insights believes that the correlation between worldwide economic growth and semiconductor market growth in 2012 will be very strong. Using a worldwide GDP forecast of 3.5%, the most likely range for semiconductor market growth in 2012 is 6-10%, with IC Insights' forecast at 7%. If 2012 worldwide GDP growth is similar to that of 2011 (3.3%), then another year of low single-digit growth should be expected for the semiconductor market.

One reason for a more optimistic outlook for 2012 is the "election year cycle." With 2012 being a U.S. presidential election year, there is precedent for a "positive effect" from this every-four-years event (it should be noted that presidential elections will also be held in Russia, South Korea, Taiwan, China, and France in 2012).

Over the past 10 U.S. election years, going back to 1972, worldwide GDP growth averaged 4.0% and semiconductor industry growth averaged an astounding 24%! In fact, the worldwide semiconductor market grew 10% or more in 8 of the past 10 U.S. election years. Wouldn't it be nice if 2012 made it 9 out of 11?

2012 sees the semiconductor industry at a pivotal point

Klaus-Dieter Rinnen, Managing VP, Technology and Service Provider Research, Gartner, San Jose, CA USA

After the honeymoon that the semiconductor industry got in 2010, 2011 marked a return to reality ??? and it was a harsh return. As sovereign debt issues in Europe and the US brought the macro economic recovery nearly to its knees, natural disasters first in Japan, and late in the year in Thailand, further rocked the semiconductor supply chain. Will 2012 bring a relief? While we truly hope that natural disasters will not be a factor, man-made disasters, the sovereign debt crisis, lack of jobs, and a saturated housing market, will overshadow the demand picture for end-user electronics. So, as GDP goes, so goes electronics sales, so goes semiconductor sales and capital spending.

The situation is further complicated by supply side factors. Coming off insufficient inventory levels in mid-2010, the semiconductor supply chain had accelerated its inventory replenishment, in turn, over-stimulating already strong 2010 sales. Entering 2011, supply side fundamentals had been compromised by elevated inventory levels, oversupply in DRAM. In addition, oversupply in foundry emerged in the third quarter. While the industry can do little about the macro-economy dominated demand picture in 2012, it must focus on its supply-side metrics, getting its house in order, to reduce exposure and set up for the next leg of the recovery. To do so, the industry embarked on an inventory liquidation in third quarter 2011 that will last into 2Q 2012. In addition, foundry spending will be cut, allowing demand to catch up with capacity. And for DRAM, spending should remain slow, mostly akin to 2011 levels.

What does this all mean for the industry next year? Barring a second recession, we are forecasting a slow first half of sales for semiconductors as the excess inventory liquidation meets the seasonal slow period. The industry will underperform typical seasonal patterns during this period but will transition to outperforming in the second half of the year. All together, this spells slow single digit growth in semiconductor sales. It also means and assumes that capital spending on new capacity will be reigned in, resulting in further quarterly sales contractions for capital equipment vendors through the first half of the year. While we anticipate investments to recovery before year-end, it will be too little, too late to turn 2012 positive in the annual comparison. So, vendors should be prepared to weather a 15 to 20% sales decline next year.

Given high uncertainty in the macro picture, there is also more down- than upside to our forecast. At this time, we believe that a second economic recession can be avoided. However if a recession were to come, semiconductor sales will likely contract further and capital equipment vendors should be prepared for significantly deeper cuts than currently forecasted. So, the industry must weather a cooling period over the winter months with hope that with the spring, the industry begins to thaw.

Chip revenue growth to track unit volume

Ron Leckie, President, Infrastructure Advisors, Saratoga, CA USA

There are a lot of concerns about the sustainability of consumer demand for semiconductors since it has a high correlation to discretionary spending, employment and the economy. The best indicator I know to use in monitoring demand is IC unit volume. Admittedly, it is influenced by the building and depletion of inventory, however, a look at historical medium term unit growth rates can tell an interesting story.

Prior to the year 2000, the long-term unit growth rate was around 10% per annum. After the recovery from the bursting of the Y2K bubble, consumer demand stepped up, due in large part to the emergence and proliferation of mobile electronics. From 2002 until the economic crash of 2008, chip units grew at an incredibly strong 14% annual rate. The 2008 crash was sharp and relatively short-lived for the semiconductor industry. Unit chip volumes bounced back quickly from that major geopolitical event and since 2010, have been on a noticeably slower growth rate below 10%.

Despite today's weak economy, high unemployment and limited disposable income, we note that chip unit shipments are continuing to grow and are far from declining. The demand for more connectivity or simply even more "cool" products seems relentless. While most people now own a cell phone, it is the younger generation who clamor for the latest and greatest gadgets. Personally, I change my mobile phone on average every 3 years, but I note that the younger generation simply "has to" change theirs every one to two years. Whether this is because there is a new one out with more features or they have simply damaged the old one, the result is the same. We can't live without them. The same appears to be happening with tablets. Personally, I have not found a use for such a product to exist in my life between my smart phone and my laptop, but it is clearly a huge success and is one of the key products driving chip demand. This seemingly insatiable demand is not going to change, and, if anything, will intensify as even more new cool products are brought to market.

As long as the economy remains weak, I expect annual unit growth to remain in the +5% to +10% range. Since 2008, and even throughout the recession, the average unit selling price has remained flat at around $1.30 to $1.40 across all IC types. I believe that it will stabilize here for the foreseeable future and, as a result, chip revenue growth should track unit volume.

Throughout 2010 and until mid-year 2011, the capital equipment industry enjoyed a strong recovery and growth period. This has resulted in increased capacity being installed in the semiconductor industry and, with slower unit growth, the net result of this increased capacity is lower factory utilization, which is likely to continue well into 2012. The industry is maturing, but it is still cyclical and what is being experienced once again is a classic cycle of supply-demand imbalance while the world recovers from the last economic crash.

Solid State Technology, Volume 55, Issue 1, January 2012

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