The Forecast for 2011: Back to Reality
01/01/2011
Pete Singer, Editor-in-Chief
The year 2010 was perhaps the best ever for the semiconductor industry, a nice rebound from the worst year ever. 2011 will likely be a year when the semiconductor industry returns to "normal", with more moderate, single-digit growth. Cyclicality is expected to continue. Here's what leading industry analysts are saying about the year ahead.
Healthy worldwide GDP forecast to support semi market growth
In 2009, a global GDP decline of 1.6% marked the worst global recession since 1946. However, in 2010, global GDP growth rebounded to post a 3.9% increase. For 2011, worldwide GDP is forecast to slow slightly to 3.8%, a figure that would still be 0.2 percentage points above the long-term average GDP growth rate of 3.6%.
 | Bill McClean, President, IC Insights, Scottsdale, AZ USA |
Over the past 30 years, the world has endured five global recessions (e.g., 1982, 1991-1992, 1998, 2001-2002, and 2008-2009) and after every one of these recessions, a booming semiconductor market immediately followed! Moreover, the semiconductor market recovery that followed each of the first four global recessions lasted at least two years, which would suggest that, if this trend continues, the 2011 semiconductor market should register a double-digit increase.
In 2010, worldwide electronic system sales surged by 11%, spurred by strong growth in the automotive, PC, and cellphone electronics markets. In 2011, worldwide electronic system sales are forecast to register a 9% increase, which would be three percentage points above the long-term average.
In the aftermath of the strong 31% surge in the 2010 semiconductor market to $313 billion, IC Insights forecasts that the 2011 semiconductor market will grow 11% and reach $347 billion, followed by similar growth in 2012. Worldwide IC unit volume shipments are forecast to increase 8% in 2011, after a 29% surge in 2010 (the second largest increase on record).
After almost doubling in 2010, worldwide semiconductor industry capital spending is forecast to increase by 6% in 2011. However, the capital spending as a percent of sales ratio is expected to continue to be only 16% in 2011, a low level that is unlikely to lead to significant semiconductor industry overcapacity.
Two of the factors that helped spur a recovery in the worldwide economy in 2010 (e.g., relatively low oil prices and record low interest rates), are forecast to continue to help support decent economic growth in 2011. IC Insights believes that its 2011 worldwide GDP growth forecast of 3.8%—or any GDP growth rate at or above 3.5%—is sufficiently strong enough to support its electronic system sales forecast of 9% as well as its semiconductor market growth forecast of 11%.
There is no doubt that the world's population is moving toward incorporating more electronics into their lives (e.g., the number of worldwide cellphone subscriptions surpassed 5 billion in 2010). Given the almost insatiable demand for electronics, IC Insights believes that the outlook for the semiconductor market over the next couple of years continues to be very bright.
From honeymoon in 2010, to reality in 2011
As 2010 winds down, so does perhaps the most spectacular year for the semiconductor industry in growth terms. A faster-than-anticipated acceleration in demand caught device providers somewhat unprepared, leading to tight supply. The result: the strong unit demand acceleration was aided by a positive pricing environment, something that is all too rare in the semiconductor device industry these days. In addition, being late to prepare, or maybe a bit too shell-shocked from the 2008/9 economic recession, semiconductor manufacturers finally poured on the spending in an effort not to lose out on opportunities, which at last presented themselves. The beneficiaries were members of the entire semiconductor manufacturing supply chain from outsourcing providers, to capital equipment vendors, to materials suppliers. It has been bliss for them as well: 2010 was a true honeymoon for the industry − a little bit of a taste of a past long gone.
 | Klaus Rinnen, Managing VP, Technology and Service Provider Research, Gartner |
But as 2010 ends, so does the honeymoon period and reality returns in 2011. If the environment in 2010 was "if you can make, you can sell it," for 2011, it will be once again, "if I can make it, can I sell it?" Covered up by the first jerk of the recovery in 2010, long term issues are coming back to the forefront. Being tied with nearly 60% of all sales to fickle consumer demand, the electronics and semiconductor industry is at an ever-increasing rate sensitized to macro-economic issues. With solvency issues emerging in Europe during 2010, the reality of a slow and lumbering recovery and overall slow growth environment returned to the demand picture. Similarly, in the semiconductor supply chain, semiconductor device sales have been running well ahead of electronics equipment sales, a non-sustainable situation counter to historical trends. A correction back to the historical normal has set in late 2010 and will dominate the picture for 2011. Bottom-line, the industry is bound to return to its long-term trends in 2011.
So, what are we forecasting for 2011? The macro-economic environment will remain a tale of two "cities." On one hand there are the developing economies, continuing to power ahead with rapid growth. On the other hand, developed economies will continue their slow-paced recovery, in many cases at a pace slower than in 2010. Under these conditions, the semiconductor industry should experience slow, single-digit growth to reach sales over $300 billion. Commodity memory will be a mix – strength in NAND flash demand should remain underlined by strong media tablet demand, while DRAM pricing will lead to a soft revenue picture. There is some upside and some downside risk, based on how strong end-user demand will be in 2011, as well as any supply side issues. So while the honeymoon might be over in 2011, the semiconductor industry should enjoy sales for the first time over the $300 billion mark. A nice reality after all.
Capital equipment spending to return to normal levels
The year 2010 will likely be the strongest year ever for the semiconductor equipment industry, which will be a nice rebound from the worst year ever. Gartner expects the growth of capital spending to continue through 2012. However, as the semiconductor industry reacts to a slowing economy, the pace of spending will slow from the torrid 96% in 2010 to a more-normalized single digit range in 2011 and beyond.
 | Bob Johnson, Research VP, Technology and Service Provider Research, Gartner |
2010 was the beneficiary of aggressive spending as device manufacturers roared back from the suppressed levels at the bottom of the recession. Demand at foundries for 65nm and 40nm technology, as well as technology for immersion steppers on the part of memory companies, drove growth. Capacity additions began to occur in the second half of 2010, as the demand for DRAM and NAND flash was growing at near-record rates. In 2011, Gartner expects capacity purchases to continue as leading-edge technologies ramp up for both logic and memory. Capex growth will slow as the markets digest the rapid growth from 2010, and semiconductor companies look to remain profitable, and thus, should not overspend significantly in 2011.
Wafer fab utilization rates peaked at 94% in the second quarter of 2010 but dropped quickly back to the 90% range as more capacity came online and semiconductor production slowed and became more aligned with end-user demand. Leading-edge utilization will run in the mid-low 90% range through most of 2011 and could drop below the 90% level if DRAM production moves into an oversupply condition. Foundries continued to ramp up leading-edge technology to meet the demand at the 65 and 45/40nm nodes, and they are preparing for initial production of 32/28nm technology. Production at those nodes should start in late 2010 or early 2011.
With the strong capex ramp-up in 2010, the outlook for 2011 is cloudy as semiconductor demand slows to a more-normal growth pattern. Our current expectations are that 2011 capex could be either slightly positive or negative, depending on whether strong spending continues through 2010, and if economic issues soften demand expectations. Memory spending should start to outpace logic spending in 2011, but current weaknesses in the DRAM market may slow investment in that area until demand catches up with capacity. NAND spending should remain strong through 2013. We are currently forecasting that memory spending will decline in 2013, thereby generating the next down cycle.
Inventory level concerns to slow semi revenue
The spectacular decline in semiconductor sales at the end of 2008 and early 2009 has been followed by an equally spectacular recovery. The bounceback was mainly driven by low capital investment, low inventory, and affordable electronics systems that are now considered a necessity, not a luxury. Exploding bandwidth consumption is also driving a significant upgrade cycle for server farms and Internet infrastructure.
 | Jim Feldhan, President, Semico Research, Phoenix, AZ USA |
Unlike in prior downturns, semiconductor applications are now more pervasive. Due to the consumer electronics focus, sales of these products involve much larger volumes, and each product includes a much richer semiconductor content. Even in the computing market, the notebook is now the largest PC segment with a higher average semiconductor content than the desktop. Over half of the notebooks sold are to the consumer market. Smart phones are growing at the fastest rate of all cell phone segments, and over half can be identified as consumer devices.
2010 will result in a 32% semiconductor revenue growth rate over 2009. This growth has been driven by increasing unit box volumes compounded by the need to rebuild inventories. The risk to the market is an overbuilding of inventory in the supply chain. Although this pattern of growth, overbuilding and collapse has been the typical semiconductor cycle, the past year has not seen the same reaction from all market participants. Half the companies have been worried about excess inventory, and many corporate leaders have been suspicious of the veracity and genuineness of this recovery. There continues to be concern over the fragile nature of the macroeconomic status of the US, Japan and parts of Europe. However, China, which is now the second-largest economy in the world, has definitely shown strong economic growth. The Chinese central bank raised the interest rate a quarter percent in October, the first time since the global financial crisis. The interest rate on a one-year loan was raised to 5.56%, and the one-year rate paid on deposits also increased to 2.5%. This increase is all part of an effort to cool the China economy to a sustainable growth rate.
Electronics companies continue to show conservative investment strategies and a genuine concern over inventory levels. It is Semico's belief that by the end of 2010 inventories will be at appropriate levels. Therefore, as we move into 2011, semiconductor demand will reflect end market growth. Based on Semico's Inflection Point Indicator (IPI), the first half of 2011 looks good; however, the IPI is indicating third quarter may be below seasonal expectations. Semico expects semiconductor revenue growth to drop from 32% in 2010 to 9% in 2011. While 2011 will show positive revenue growth, the drop below a double-digit rate will feel like a significant slowdown.
A major factor causing the slower growth in semiconductor revenues will be more competitive pricing in the memory market. Semico expects both DRAM and NAND pricing to return to a historical pattern of declining average selling prices. We see a similar trend with analog ICs and discretes.
Demand for electronic products will remain strong, but the efficiencies of our technologies and supply chain will bring revenue growth rates down in 2011.
Semiconductor manufacturing: still humming in 2011
After experiencing a skyrocketing year of unexpected, robust orders and tight capacity, we'll come back down to earth in 2011 with a healthy but much slower growth in semiconductor unit and wafer demand. Semiconductor units will grow by 10% in 2011 after experiencing a 30% growth rate in 2009. Inventories will be fully replenished at the beginning of 2011 thereby alleviating demand for additional capacity due to restocking.
 | Joanne Itow, Managing Director, Manufacturing, Semico Research, Phoenix, AZ USA |
Capital expenditures increased significantly at the end of 2009 through 2010 and Semico expects to see capacity utilization drop slightly in 2011. The additional capacity being added by the foundries will get us back to a competitive environment as it relates to pricing. In addition, 32nm/28nm will be well into volume production and pricing should begin to reflect economies of scale and improved productivity. But overall, capital investment is not out of control and overcapacity does not look like it will be a big issue in 2011. Semico continues to assess the second half of 2011.
Demand should continue to be strong for the advanced technology production capacity as computing, communications and consumer devices add new features and products that require more advanced semiconductors. Blu-RayTM disc players, 3D TVs, tablets, and smart phones are just a few of the electronic devices increasing in volume and demand for advanced technologies.
On the other side of the technology spectrum, a variety of analog and discrete products are continuing to utilize mature capacity. Wafer demand at 350nm and larger technologies will grow almost 9% in 2011, only slightly slower than overall wafer demand. MEMS devices such as sensors, accelerometers and resonators are expected to grow in volume as the automotive, consumer and medical applications begin building in intelligent sensing electronics.
The Semico IPI (Inflection Point Indicator) is indicating a possible slowdown in the second half of 2011. We will certainly be keeping our eyes and ears open for additional signals which might change our outlook. But overall, semiconductor manufacturing should keep on humming along in 2011.
"Fear followed by greed" cycle following nature's course
Forecasting in this market is virtually impossible and that is why I don't really consider myself a "forecaster." What I do is study industry trends and interpret them based on my 40 years' experience in the semiconductor and related industries. Even that is a big challenge considering the economic cycle we have recently experienced.
 | Ron Leckie, President, Infrastructure Advisors, Saratoga, CA USA |
I always start by studying semiconductor and, more specifically, integrated circuit shipments. In the fourth quarter of 2008, chip units and revenues declined more rapidly than ever before due to the global economic recession. In barely five months between September 2008 and February 2009, shipments dropped by almost half. This caused widespread panic with doors being rapidly shut on hiring and spending, followed by massive layoffs. Chip inventories were not really excessive and with underlying demand for semiconductors not falling by that same 50%, it soon became apparent that the panic had led to an over-reaction. Only a year later, by February 2010, unit volumes had recovered to that same peak last seen in September 2008. Since then, chip units and revenues have continued to grow, but the question is whether the current growth is replacing lost inventories or if true demand is pulling it through the supply chain?
By my count, I have now lived and worked through seven semiconductor industry recessions. Looking at the data on an annual calendar-year basis, 2001 was worse than 2008/9. However, when one studies the monthly data, it shows that the peak-to-trough drop was almost the same in both cycles. The duration of the 2001 recession was much longer than in 2008/9−inventories were way out of control and in 2001, unlike in this recent recession, there was a significant dislocation in average selling prices. The one common trait in every recession has been that the downwards part of the cycle experiences "undershoot," i.e., goes lower than necessary. The recovery cycle always "overshoots" or over-corrects.
What appears to be occurring now is that the rapid recovery is once again in "overshoot." The "fear followed by greed" cycles are following nature's course and, in fourth quarter 2010, we are now seeing a slowing in chip production, which will extend through the seasonally slow first quarter of 2011. Beyond that, we certainly cannot expect to see chip demand continue at the record rate it has exhibited in the recent recovery, but it can be expected to get back on the more stable and healthy 12% to 15% unit growth rate that the industry experienced prior to this recession.
Thus, my outlook for 2011 is one of a moderately slower ending to 2010 that extends through much of the first quarter of 2011, but then continues through the balance of the year at a healthy, low double-digit percentage growth rate. Of course, I may be wrong, but that's the very nature of forecasting.
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