2009 Economic forecast Look for rebound by 2010
01/01/2009
2009: replay of the mid-1990s
During the first half of 2008, the chip market held up well, better in fact than many predicted, but come the second half, the repercussions of the US sub-prime disaster had spread to the bigger global financial system, tipping the US and Europe into recession. With the real economy now collapsing, September marked the start of the 11th chip industry slowdown. We now expect Q408 to be down 6% on Q308, making 2008’s growth just 2.2% on 2007 ??? the fourth consecutive year of single digit market value growth. Staring a global economic recession in the face, will 2009 be a re-run of 2001? We think no.
Looking back over the industry’s 60-year history, downturns are always caused by excess capacity, triggered either by demand or supply side issues e.g., by over investment (making capacity overshoot demand) or a demand slowdown (whether through an inventory burn or recession) making short-term capacity exceed near-term demand. The 2001 slowdown was unique in that it was triggered by both demand and supply-side issues, namely; the collapse of dot-com inflated demand euphoria, a 9/11 driven economic slowdown, a resultant massive inventory burn, just as a huge amount of excess capacity was coming on stream. Everything that could have gone wrong did go wrong, the so-called perfect storm. This destructive combination has never happened before.
 Malcolm Penn, CEO, Future Horizons, Kent UK |
Entering 2009, we have no serious overcapacity in place (pre-slowdown utilization rates were in the 90% region), a cap ex cut back that started 12-18 months before the slowdown hit, and IC ASPs in the middle of a cyclical upward trend. In addition, IC units had been running at or below the 10%/yr long-term trend line, with no serious excess inventory in the supply chain. For once, the industry is in structurally good shape to enter a recession. This will make the 2009 downturn statistically shorter than it would otherwise have been.
That said, such is the extent of the current industry slowdown, the first half of 2009 will be bad, down 8.7% from 2H08, but we expect a recovery starting 2H09, with the full year down just 2% in 2008. However, 2010 will see a strong market rebound, driven by a major capacity shortage and a rebounding world economy. A capacity undershoot is inevitable in 2010-11, which will take 18-24 months to correct (and overshoot again) making 2011-12 the next double-digit growth years. Far from 2009 being a re-run of 2001, the dynamics are looking more like a replay of the mid-1990s.
US and worldwide economy deal the industry forecast a wildcard
In 2008, 2.5% global GDP growth will be 31% below the 30-year long-term average of 3.6%, while 2009 global GDP growth is expected to be only 1.0%???1.6 percentage points under the global recession threshold of 2.6%. In 2008, worldwide electronic system sales will increase by 4%. However, directly impacted by the expected global recession extending into the first half of 2009, total 2009 worldwide electronic system sales are forecast to register the third decline in history (the others occurred in 2001 and 2002).
 Bill McClean, President, IC Insights, Scottsdale, AZ USA |
The “wild card” in the 2009 forecast is the worldwide economy, particularly the U.S. economy. While much has been made about the “decoupling” of the U.S. and other countries’ economies, IC Insights believes that the major economies of the world are likely to face the upcoming recession together.
The effect of a global recession on the worldwide semiconductor market in 2009 depends on the magnitude and duration of the recession. The expected severe U.S. recession and steep global recession are likely to cause the worldwide semiconductor market to show at least a 10% decline in 2009.
Worldwide IC unit volume shipments are forecast to decline by single-digit levels in 2009 down from a 6% increase in 2008.The expected decline in IC unit shipments would be the third time (i.e., 1985, 2001) in history that IC unit shipments have dropped.
On a quarterly basis, IC Insights believes that the global recession will not extend beyond 2Q09. Driven by low oil prices, a worldwide reduction of interest rates, and economic stimulus packages coming from the U.S., China, Europe, Japan, and other countries, the worldwide economy and semiconductor markets in the second half of 2009 are forecast to show a noticeable rebound from the poor performance exhibited in late 2008 and the first half of 2009.
Worldwide semiconductor industry capital spending is forecast to decline 18% in 2009 after falling 24% in 2008. Even with these cutbacks in spending, IC ASP is expected to fall 8% in 2009, the same as the decline forecast for 2008. However, as a direct result of these steep capital spending declines, and a capital spending as a percent of sales ratio that is likely to reach an all-time low (15-16%) in 2009, IC ASPs are forecast to rebound (very strongly for DRAM and NAND flash memory) and spur double-digit semiconductor industry market growth in 2010, 2011, and 2012.
Economic crisis spurs 2% drop in 2008 chip market
Based on the actual third-quarter results of 121 leading semiconductor suppliers and on fourth quarter revenue estimates based primarily on financial guidance provided by the major chipmakers, as of November 2008 when this was written, iSuppli Corp. predicts that 2008 semiconductor revenues will decline by 2%. iSuppli’s previous forecast, from September, called for 3.5% growth.
It is notable that the slowdown in the semiconductor industry actually began in the third quarter, before the financial crisis began sweeping the world in October. Previously, iSuppli had predicted that the third quarter would generate 7.9% growth in semiconductor revenue compared to the second quarter. Actual revenue growth for the third quarter has been measured by iSuppli at a very anemic 2.5% quarter-to-quarter rise. Year-over-year revenue in the third quarter was down by 2.9%.
Weak to strongly negative growth was reported in the third quarter by the complete range of semiconductor suppliers, large and small, across all markets. However, memory suppliers are suffering the most severe declines. iSuppli expects the negative momentum to continue into the fourth quarter with the overall market expected to decline by 8.8% compared to the third quarter of 2007, or a 10.9% reduction compared to the fourth quarter of 2007.
 Dale Ford, SVP, Market Intelligence, iSuppli Corp., El Segundo, CA USA |
Numerous companies are reducing their fourth-quarter outlooks on an increasingly frequent basis. This would seem to indicate that there is a strong possibility that the fourth quarter decline and the resulting 2008 results could fall even further.
In discussions with semiconductor suppliers, equipment OEMs, and contract manufacturers, a story of fear and great uncertainty has emerged. As dramatic declines in consumer and industrial confidence began developing in late summer, order cancellations began to grow and in many cases, slowing orders degenerated into a complete stop in orders as players across the supply chain moved to extremely cautious positions in the face of increasingly negative economic news.
The semiconductor industry saw its business slow dramatically even before the financial crisis that hit in October. The psychology of many industry players now has shifted to a survival mentality, with cost control and cash conservation considerations driving decisions. The extremely low level of consumer confidence clearly points to a very difficult fourth quarter for the industry.
Chips and equipment go negative in 2009
Writing this forecast in early October 2008 using available data, it is apparent the global financial crisis is putting greater downward pressure on an already sluggish economy. Consumer and business confidence has further eroded and the global crisis has frozen the credit market, restricting the ability to borrow funds for capacity expansions. Consequently, VLSI Research is predicting a very difficult year for the entire food chain, from electronics to chips and equipment.
 Aida Jebens, Sr. Economist, VLSI Research, Santa Clara, CA USA |
VLSI expects both consumer and business spending to stagnate in 2009, resulting in a very slight 3.5% growth in electronics. At this rate, worldwide electronics shipments should amount to $1.7B. Despite all the negative sentiments about the economy, we do not believe electronics sales will be in negative territory next year for several reasons: With the exception of 2000-2001, there has never been a case in history when an economic slowdown or recession resulted in a drop in electronics sales. The 2000-2001 period is different because it was driven by the Y2K tech boom and was made worse by the terrorist attacks. We do not have the same situation today. We simply have a very nervous sentiment because of the economy. Electronics tend to do well in a slow economy. At the consumer level, people tend to cocoon in their homes when times are tough. Instead of going away on vacation, or going out for entertainment, they tend to buy electronics. At the business level, sure there will be a pullback in spending on high-end servers, but even in recessions, businesses tend to buy computers and peripherals, and networking hardware to improve efficiency and boost productivity.
A slower electronics growth means that there will still be a demand for chips, but OEMs will be able to supply it from existing inventories. In addition, we expect the glut in memory to continue through 2009, keeping prices down. Consequently, we expect chip sales to contract by 7% to $210B next year. We also predict that unit growth will slow to 2%, resulting in 169B units of ICs shipped. The unit growth is down from 9% in 2008 and well below the double-digit growth rates of the past.
With the slow down in the growth in IC unit shipments, utilization rates will fall in the mid-80% range, which does not bode well for equipment makers. IC equipment sales will fall back to $39B, or 12% lower than in 2008. Chip makers will continue to spend, but at a lower level than in 2006-2007. Memory makers’ share of the overall equipment spending will fall to ∼25-30% of the total, which is where they were prior to 2005; in comparison, they were at 40-45% in 2006-2007.
VLSI Research expects the first half of 2009 will be especially challenging as the economy slowly mends, but we expect a turnaround to occur later in the year. Central banks all over the world have been working in concert to flood money into the system. This should help free up the credit market, restore confidence and jump-start the economy and the semiconductor industry. We already have some first-hand evidence that these efforts are taking effect. The Libor rate (London interbank offered rate: the interest rate that banks charge each other) is finally coming down and the cost of insuring the debt of financial firms is dropping sharply.
Semiconductor industry is living on the edge in 2009
Call it a fluke, call it luck, or call it immunity, but for most of 2008, the semiconductor industry appeared unaffected by the economic turmoil that was brewing around the globe. In September, however, the shoe dropped, and a demand-driven down-cycle is now upon the industry. Gartner now expects 2008 semiconductor growth to be ∼2%, and predicts that, in 2009, the market will experience anything between a decline of 2% and growth of 1%. In addition, we currently expect a capital spending decline of ∼17% in 2009, and capital equipment to drop roughly 18%.
Four main areas highlight our concern for the industry in 2009:
 Klaus Rinnen, Managing VP, Gartner, Washougal, WA USA |
Economic environment: Based on current economic forecasts, we assume improvement in GDP growth to start on a quarterly basis in 2H 2009, leading to a slow economic recovery and a strengthening environment for device unit demand, which will likely be in the low single digit growth range for 2009. This will be associated with a flat to potentially declining semiconductor revenue picture. We anticipate that this slow unit growth will not result in any significant capacity need, but will mostly be handled by the existing installed base, as shrinks of existing designs offset the impact of slightly higher unit demand and new design tape outs.
Semiconductor inventories: In excess condition for all of 2008, we believe inventories will rise in 4Q, overshadowing demand and reducing production needs for 1H 2009. This will lead to a reduction in factory utilization.
Capex: Continued weakness in memory sectors combined with reduced production due to increased inventory levels are causing many manufacturers to drop spending projections. Memory financials continue to worsen, causing suppliers with cash flow problems to delay or eliminate capacity expansions. Some vendors are even postponing investments for needed technology improvements because of profitability problems.
Outsourcing services: These will contract for the first half of the year in conjunction with the rest of the industry. However, the third quarter will begin to show signs of life in the industry again, as both foundry and assembly/packaging/test begin to increase utilization rates in response to improving market conditions.
2009 will be a challenging balance act. While companies have prepared for bad times, there is only so much under their control. How deep and how long the recession lasts is determined by the economy.
A brighter year in 2009
What will 2009 bring to the semiconductor market? Will the difficulties of 2008 extend to next year? Will today’s financial meltdown drive further woes? Is there any chance of the market improving? Although all eyes today are focused upon the world economy, significant demand slowdowns for semiconductors have been extraordinarily rare, the last two being in 2001 and 1986, a full fifteen years apart. Even the stock market collapse of 1987 failed to weaken chip demand. It is very likely that today’s chaos, no matter how concerning, could have a very minor impact on 2009 semiconductor revenues.
 Jim Handy, Director, Objective Analysis, Los Gatos, CA USA |
The semiconductor market’s biggest problems usually stem from issues internal to the industry: oversupplies and undersupplies, with the biggest impact invariably coming from the memory business.
Memory chips have a profound impact on the overall semiconductor business, a fact to which 2008’s total semiconductor revenues can attest. We at Objective Analysis develop our own outlook for the total semiconductor market from the perspective of the memory sector, and this served us well in past forecasts. Memory capital spending slowed in the second half of 2007. History shows us that we should expect the market to reach a supply/demand balance toward the middle of 2009.
Only a year ago, Objective Analysis warned that a 2008 memory revenue decline of ∼20% was nearly inevitable, dragging the overall semiconductor market down ??? this was at a time when most forecasters were anticipating moderate growth for both memories and semiconductors this year. The year is indeed materializing the way we anticipated. Year-to-date memory figures show a 22% decline in revenues.
Other semiconductor markets are faring better than memories ??? non-memory semiconductors have grown 11.5% year-to-date, but the woes of the memory business serve to drag down total semiconductor revenues. Although it is likely that the year will end with non-memory growth relatively close to this number, once memory is added to the mix, growth drops by more than half, to ∼5.5%. In 2009, with smaller memory declines, and with stronger growth in non-memory semiconductors, it is almost certain that we will see total semiconductor growth >10%.
Based on this logic, Objective Analysis forecasts that 2009 total semiconductor market revenues, driven by a recovering memory market, will grow and between 10???15%.
Swimming underwater? Hold your breath!
Probably the best way to describe the start of ‘09 is with a quote made during a Q3 earnings conference call. It doesn’t even matter if the quote came from someone in the semiconductor industry. The message is germane to everyone who runs a business: “We are all going under the water. We will see who can hold their breath longest.”
 Carl Johnson, executive director research, Infrastructure, Sturgeon Bay, WI USA |
For the semiconductor and semiconductor equipment businesses, this quote is really accurate. Just about everyone will start out under water in ‘09. I can promise you that there will be a heady bounce (picture someone releasing a balloon from the bottom of a pool) sometime in the first few quarters of next year. I can confidently say the bounce will fuel some optimism from the industry analysts and the Wall Street community.
Write a full year forecast with numbers to the decimal for ‘09? Are you kidding? It’s an exercise in futility. I will go as far to say that there will be flashes of semiconductor growth in ’09. From a whole year perspective, I would be very surprised to see a positive number on the revenue line. The macroeconomic scene sets the stage for a shakeout in ’09. Survival will be the most significant challenge.
In terms of capital spending, a bounce off a pitiful Q3-Q4/Q1 ’09 is going to happen, but when all the beans are counted, the totals will fall far short of numbers recorded in ’08. Throughout the year, equipment will be available at fire sale prices on just about every street corner. Equipment companies are even in more of a survival race and many are not going to make it.
The wreck of ‘08 sets the stage for another, more decisive, round of asset rationalization. Yes, lessons have been learned and many are responding with much more resolve than seen in past cycles. Companies with cash (as long as they don’t squander it to appease Wall Street) and diversified business models, are the best bets. One would think the industry would be done with the serial restructuring that has gripped the sector since the ‘01-’02 cycle, but that is not the case. The hand of the market is now forcing companies to acknowledge that this time is different. I anticipate some dramatic change. After all, you can only hold your breath so long.
2009 outlook: hooked on silicon
This is probably the most difficult time ever to predict the industry’s behavior for the year ahead. I am not a quantitative forecaster or economist, however I do regularly provide independent qualitative research and industry analysis for clients.
 Ron Leckie, President, Infrastructure Advisors, Saratoga, CA USA |
Until this latest round of economic woes, I was actually hopeful for a turn-around in the semiconductor capital equipment sector by mid-2009. The semiconductor industry fundamentals were in reasonable shape except for memory, which plays to its own beat. Most technology companies throughout the supply chain have taken a very deliberate approach to managing their finances so that they can weather the usual cyclical downturns. Even up through September, global chip unit demand has remained strong and looked as if it could pull the industry through yet another typical over-capacity cycle.
This all changed late in the third quarter when it became clear that the US economic situation was worsening and spreading to Europe and other regions. Now that we face a global economic crisis, there is a second wave, which is starting to impact the semiconductor industry. As has been proven many times over the years, there is a strong correlation between the economy, as measured by GDP, and the semiconductor industry. When income and savings are impacted, discretionary spending is the first area to be reduced.
Semiconductor factory utilization has started to show signs of weakening and though chip inventories are not out of control today, they will need to be reduced in the face of a protracted downturn. The only way to reduce inventories is to cut production rates substantially below the underlying true demand. This “undershoot” will bring down utilization until the supply-demand can again be balanced to match true demand, which will likely take through much of the first half of 2009. Any growth from that point will depend on the economy and consumer confidence.
The semiconductor capital equipment companies had already felt the pain of a traditional over-capacity cyclical downturn, which started in 2007. The recovery from this will likely be protracted through 2009 and into 2010.
The good news is that we are all addicted to our tech toys and though discretionary spending is currently under pressure, this dependency is not going away. The tech sector is key to our future and will do well in the long term, but clearly, 2009 will not be an easy year and is a time when the stronger companies should be positioning themselves strategically for growth in the recovery.
HDDs will weather the economic storm
Global economic turbulence will leave no business sector untouched in 2009. For one, PC sales will slow as buyers conserve cash. HDDs will also be affected, but less so as storage requirements continue to expand; and don’t believe what you hear and read about flash or SSDs. While this technology enjoys wider acceptance, HDDs continue to provide the best price-performance ratio. In times like these, cost-effectiveness is more important than ever.
 Mark Geenen, Founder/president, Trendfocus, Cupertino, CA USA |
Mobile computer sales will buck global pressures to post double-digit growth. “Netbooks,” which are really entry-level notebook PCs, will experience broadening appeal as buyers seek lower-cost alternatives. Virtually all of these products, from entry-level to premium, will use an HDD. Average storage capacities are growing, with most PCs using 160GB to 250GB, but an increasing number of users will opt for 300GB and higher.
External HDD sales are booming as well. Whether it’s for data backup or just more storage, users are taking advantage of attractive pricing to purchase hundreds of gigabytes of capacity, often for less than $100. With some PC buyers holding off new
eplacement purchases, adding plug-and-play incremental storage is a smart buy.
Consumer electronics is fertile ground for HDDs. Digital video recorders (DVRs) continue the march to global pervasiveness, with tens of millions installed and demand on the rise. All DVRs use an HDD, and digital/HD broadcasting is causing an upward swing in storage capacities. Digital video cameras are shifting to HDDs for higher storage capacities, and gaming consoles with HDDs are rising. Automobile navigation systems, with audio and video content playback, are using more HDDs.
Technically, HDDs will continue to evolve to provide higher-capacities at ever-lower costs and will stave off serious SSD penetration for now. New technologies, such as discrete track recording or bit patterning, promise to push HDD capacities into the multi-TB arena in the coming years.
SSDs are finding homes in enterprise applications that need higher throughputs, and in specific portable computing applications. Costs are still too high for many traditional IT uses, although prices and performance metrics are sure to improve in the next year.
In summary, data storage requirements will continue to grow in 2009, and most of that expansion will be served by HDDs. Again, don’t believe what you hear ??? HDDs will continue to be the backbone of storage for years to come.