Continued Growth in Semiconductor Outsourcing Services
08/01/2008
As we enter the second half of 2008, the sedate long-term growth pattern of the semiconductor industry continues. Overall, Gartner-Dataquest’s forecast predicts semiconductor revenue growing at a 4.9% CAGR from 2007 through 2012.
Almost everyone’s attention is focused on the world’s economic problems including stratospheric oil prices, the probability of a U.S. recession, and continued problems with worldwide financial institutions. The final impact of these factors on the overall demand picture for electronics and semiconductors places a cloud over the near-term future.
This will affect several long-term trends and growth patterns. Long-term growth rates for the semiconductor industry have been moving towards single-digit rates for most of this decade, and are likely to continue. Increases in unit volume are accompanied by decreases in average selling prices, falling in line with standard supply/demand economics. The increased costs of continually moving to smaller and smaller wafer fabrication feature sizes has driven many companies to slow the migration of their product to the absolute leading edge. Finally, since memory is basically a commodity product, revenue growth has become virtually stagnant, in spite of soaring unit volumes and continued capital investment.
Outsourced Semiconductor Manufacturing
For 2009, we see combined growth for front- and back-end outsourced manufacturing services at 7.6%. This is followed by another 12.6% increase in future outsourcing services in 2010. 2011 will see a slowing to 2.8% growth, but will accelerate again with another 13.0% growth in 2012. However, continued economic difficulties could change this picture dramatically.
Semiconductor Assembly and Test Services (SATS)
In 2008, the SATS industry has seen slower growth compared to 2007. Concerns about rising commodity prices that affect packaging raw materials such as gold wire, copper lead frames, and substrates continue to exert pressure on SATS companies to pass on price increases. For the entire year 2008, our SATS market forecast calls for growth of 6.6%, reaching $21.95 billion in revenue.
The second quarter saw packaging activity improve after bottoming out in the February-March timeframe. While monthly growth rates have slowed substantially over the past 6 months, they turned more positive in the March-April-May period. Many broad-based package suppliers exhibited monthly revenue increases in May over both March and April. Year-over-year monthly sales have also been positive. Back-end utilization rates have been in the 80 to 85% range since the beginning of the year, depending upon package mix, and will improve slightly in the second half.
Pricing has become more dependent upon the fluctuations in the oil and commodity markets, and additional cost adders may be necessary. Even with that, there will be pressure to reduce package and test prices, especially in the highly volatile, price-sensitive memory markets.
SATS capital spending will continue to be down for the remainder of the year. Based on announced plans, capex for SATS companies will decrease 5.8% this year from $3.44 to $3.24 B. But as the market recovers in 2009, unit volume should increase again. This, in combination with the shift to higher-priced packaging solutions (especially in the advanced DDR memory market), should result in a 15.0% increase in spending to $3.73 billion.
Conclusion
This quarter (Q3) is characteristically the strongest growth quarter of the year for the semiconductor industry, and we hope it will be. However, if economic conditions continue to deteriorate further in the U.S. and Europe, and the rest of the world follows suit (especially Asia), then slow demand is certain to result, and with that, decreased demand for manufacturing processes and services.
But there is a bright spot. Even in this environment, the point is closely approaching where advanced processes and technologies offered by outsourced wafer fab and packaging/test services are of equal production competency with most semiconductor company’s internal development and capabilities. These IDMs and OEMs have grown their dependence upon the outsourcing community in recent years with “asset lite” and “fab lite” strategies. For many, there may be no turning back to in-house production as in previous cycles. For them, it would require too much time and money to return to internal/captive manufacturing. This plays directly into the hand of both the foundry and SATS companies. The result is that foundry and SATS outsourcing services will expand, and at faster growth rates than the overall semiconductor industry.
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JIM WALKER, principle analyst, may be contacted at Gartner Inc., 251 River Oaks Parkway, San Jose, CA 95134; E-mail: [email protected].