Future Horizons: Semiconductor industry at start of next growth phase
The brutal memory price war of 2007 is in keeping with the underlying industry dynamics.
By Ann Steffora Mutschler, Senior Editor -- EDN, January 2, 2008
In its monthly update report, U.K.-based market research firm Future Horizons said it remains convinced that the industry is at the start of the next growth phase, which started in Q1 2006, only to be knocked of course in Q1 2007, with the trend recovering in Q3 2007 and suspected to have risen again in Q4 2007, which is typical of past recoveries whereby the slow path of recovery is temporarily knocked off course by an industry wobble.
Setting the stage for this prediction, the firm reminded that October’s WSTS brought continued cheer for the chip market, with IC unit sales up 13.7% versus September, 17.8% versus the same time last year.
Even taking into account the normal month-by-month quarterly IC unit shipment behavior, these results were decidedly good news, the firm said, given that average selling prices (ASP) were down 9.4% versus September, 7.6% versus the same time in 2006, which was lower than preferred but still nothing to get worried about.
“Based on these results, we still believe Q4 2007 will show around 2 to 3% growth versus Q3 2007, bringing the year-end number in line with our 4 to 5% year-on-year growth forecast. YTD growth is currently 4.9%, with units up 10.1% and ASPs down 4.8%,” the firm said in its report.
“Compared with this time last year, 2007’s growth has been much steadier, despite the massive price war in memories. Whilst 2006 versus 2005 YTD IC growth was higher, at 8.6%, it was much more turbulent with units up 20.3% and ASPs down 9.7%. This does bode well for 2008. The times may still be troublesome, but the trends are very comforting,” the firm continued.
The slowdown in unit demand – from 20.3% to 10.1% – is not bad, given the underlying 10% annual growth trend, meaning, the first half year 2007 inventory correction has correctly done its job and that the fundamental inventory dynamics are now much better aligned.
While there will be some imbalances moving into Q1, both due to the seasonally slower unit quarter and the inevitable Q4 2007 supply-demand mismatches, these should be noise-level adjustments, not a catastrophic slowdown.
“Looking ahead to 2008, a rundown of form for our semiconductor horsemen – the economy, capacity, unit demand and ASPs – shows remarkable calmness,” Future Horizons said.
Although the global economy is still recoiling from the meltdown in the financial sector, the world’s central banks are united in their efforts to pump liquidity back into the system, whilst at the same time committed to keeping the inflation tiger securely in its box, the firm reminded.
“One would like to think, too, that there have been some ‘strong words’ behind closed doors on the need for the financial community to curb their financial creativity. Unfortunately, we see this as just the tip of a fundamental malaise – the almost universal desire for industrial and political quick fixes and instant gratification versus long-term commitment and sustainable growth,” Future Horizons wrote.
“Granted the IMF – the preferred source for all of our economic data – has reduced its 2008 global growth forecast from 5.1 to 4.75% but this is still way over the 3.4% long-term average. Whilst they also concede that most of the risk is on the downside, they do not see next year imploding at the world level, despite factoring in a severe slowdown in the U.S. economy,” the firm continued.
If 2008 sees a worldwide GDP growth in the 4%-plus region, there will be not meaningful slowdown in the underlying demand for ICs and for these reasons, any first half-year inventory correction will be modest at worst. The firm stands by its 10% year-on-year IC unit growth forecast for 2008.
2007 capex was up approximately 8% versus 2006, has already determined 2008’s capacity, which roughly equates to an 8% capacity increase. In other words, 2008’s capacity increase will be lower than the IC unit growth forecast.
Even taking into account timing and other near-term mismatches, utilization rates, already running high, will remain in the 90s for the whole of next year, gradually getting tighter as the year plays out with the only thing knocking this scenario off course is an unexpected and unlikely inventory correction or a sudden slowdown in the global economy, which is possible but not yet on the radar screen.
When it comes to IC ASPs, monthly data shows the reversal in the monthly IC ASP decline that started in April 2007 which Future Horizons believes is sustainable into 2008.
This reversal took place against a brutal memory price war and is in keeping with the underlying industry dynamics. The year-on-year ASP trends exhibit a definite – and long – cycle, with a long period of climb followed by a sudden correction and fall.
As such, the firm remains convinced that the industry is at the start of the next growth phase, which started in Q1 2006, only to be knocked of course in Q1 2007, which was just a wobble, not a reversal. The trend recovered in Q3 2007 and suspected to have risen again in Q4 2007, as well and is quite typical of past recoveries whereby the slow path of recovery is temporarily knocked off course by an industry wobble.
“Like compound annual growth rates (CAGR), year-on-year growth numbers can be very misleading, but the underlying trends are remarkably clear. Each sharp negative decline is triggered by a global economic or industrial event and happens very quickly, typically in 12 to 18 months. The climb back up is, in contrast, slow and often disruptive, but climb back it does, and we believe climb back it will,” the firm said.
The firm is forecasting 2% year-on-year ASP growth.
Further, the firm reminded that 2007 saw a sizeable increase in overall IC capacity, driven by the 23.1%increase in capex in 2006 versus 2005, 25.7% in the all-important wafer processing sector and that there is a 9-month delay between a capex spend and saleable units out.
IC capacity was up 17.5% in Q3 2007 versus Q3 2006, whereas 2007 YTD IC unit shipments have grown by 10.1%, with a tendency in the market for oversupply over the past 12 to 18 months, a trend that is currently being addressed by the industry.
With the level of new orders sizeably lower than current sales since January 2007, the rate of new net capacity additions must inevitable slow down during 2008, given today’s cap ex orders thus equals new IC sales four quarters later. The net result is that capacity increases will be much lower in 2008. Provided IC unit demand holds up, the only net outcome is a further increase in today’s 90% utilization rates, Future Horizons concluded.
