2011 heralds correction, analysts agree

Analysts say opportunities in smartphones, media tablets, and the connected home will help to offset a mid-year overcapacity and average selling price drops.

By Ann Steffora Mutschler, Contributing editor -- EDN, January 3, 2011

Following a more than 30% growth rate in 2010, thanks largely to a boom in memory sales, the semiconductor industry heads into 2011 expecting far less impressive growth in the low to mid single digits.

While semiconductor revenue growth is expected to continue in 2011, the factors that drove the growth in 2010 will lose their potency next year. As a result, iSuppli expects a "soft landing" for the semiconductor industry in 2011 with 5% annual growth, according to Dale Ford, senior VP for market intelligence services at iSuppli Corp.

"However," he continued, "you can't ignore the one basic assumption in all of this is that there's not a serious economic downturn again. That's the one factor that there is still a high degree of uncertainty about and that leaves everyone still quite nervous.

"On the other hand, the forecast isn't calling for a dramatic improvement in the economy, either. It's calling for a year where we continue in this challenged mode. If there were a strong economic rebound it could probably add some to the growth in our forecast outlook but that's not happening so we are taking a middle ground on the economic outlook by calling for a significant rebound economically; we're not calling for another significant decline. In that type of environment the consumer patterns, the spending patterns we think will hold up in terms of electronics sales," Ford explained.

As part of the correction the semiconductor industry will experience in 2011, big challenges are coming. "Companies are going to continue to be somewhat cautious about their capital investment in manufacturing capacity," he observed. "There's going to be a continued influence of the recent downturn we've gone through. Even though companies are seeing strong demand, they're going to be somewhat cautious. They don't want to get themselves overextended into a major investment in the capacity and then get stuck if we do wind up with another major economic downturn that impacts us."

And then there is the volatile memory market. After three strong years of DRAM growth, iSuppli expects the memory industry to continue its volatility and believes 2011 will be a year of oversupply, with intense pricing pressure on DRAM and memory components. "For the memory players, it's been great: They've had three really good years in terms of memory - this last year in particular with the incredible growth in memory, but that story will turn around significantly in 2011," Ford pointed out.

Bryan Lewis, research VP, semiconductor forecast, ASIC, SOC, and FPGA for Gartner's technology and service provider research, pointed out that 2011 challenges will occur on two fronts. First, the DRAM market is potentially looking at double-digit negative revenue in Q4 2010, and then going into 2011, which sets up the year in pretty bad shape with pricing on DRAM brutal. Second, he said, capacity peaked in the middle of 2010, so lead times are coming way down along, and ASPs are starting to come down, as well. "When that happens, inventories start rising and we are starting to see that happening. The key is to keep a very close pulse on customers to make sure you don't get stuck with a bunch of inventory."

While PCs will still make up the bulk of demand in 2011, that growth rate is slowing, with other applications such as smartphones, media tablets, and home connectivity buoying demand.

ISuppli's Ford pointed out that while many players in the home environment along with a lot of OEMs focus a great deal on 3D TV, he believes a bigger story for semiconductor suppliers will be in the realm of electronics device connectivity within the home in a consumer-friendly way. "This is where you can have an Apple TV-type product, where you can stream TV or video from your iPad to your TV in a very easy, consumer-friendly fashion," he explained. "Or it's having embedded into your TV or embedded into your Blu-ray player the ability to go out and stream content from the Internet.

"That ability of accessing and managing your content from multiple sources is going to become much more highly visible and will be one of the things helping stimulate consumers engaging in the market again. Empowering the consumer to more easily control, manage and access content from multiple sources is a very exciting story," he asserted.

Media tablets represent a very hot growth market in 2011, partially displacing netbooks. Jim Handy, director at Objective Analysis, pointed out that a lot of people are hanging their hats on tablets but that Apple seems to be the only company that is doing well in that category. "Everybody else has something they are selling but are not selling as many of them. That's an interesting market. Is it an Apple market or is it a tablet market. My take is that it is an Apple market. The tablets are going to do OK from a whole market standpoint - Apple is going to do spectacularly with them."

Further, smartphones will continue to be an exciting opportunity, and are expected to expand more into mainstream penetration with some blurring between high-end feature phones and smartphones, Ford said. "Consumers may not necessarily know the clear differentiation between the two: but that high end feature phone and smartphone category will continue to be a very exciting category in terms of driving wireless growth opportunities," he said.

Gartner's Lewis agreed that the key applications in 2011 would be Android-based smartphones and media tablets/iPad clones. "From an application point of view, those are the key ones that remain strong through the forecast period - that's where the bulk of the big dollars are coming from. ... The media tablet is coming on like gangbusters."

While not impressive yet in terms of revenue, sales of semiconductors into automotive electronics were the highest growth category for semiconductors in 2010, Ford noted. "Even though automotive car sales are not that dramatic, the significant penetration of electronics, not just in the infotainment systems - powertrains, fuel efficiency, safety-continue to see significant increase in the penetration rate of electronics and semiconductors in the automotive space." This trend is expected to continue with Freescale remaining the biggest supplier of automotive electronics.

Objective Analysis' Handy also believes solid state drives are a hot application area even though they have never seen burgeoning success and are expected to continue to receive a mild reception. But, he said SSDs in enterprise storage applications and big data centers have been hot and will continue to get hotter but won't be a big driver for semiconductor consumption in 2011 because unit volumes are relatively small.

Further, he expects to see video emerge as an extremely large user of semiconductors in general over the next few years. "Eventually, we're going to get to the point where standard automobiles come equipped with cameras that are in police cars today that'll be used for forensic purposes that after you've had an automobile wreck, if it's a hit and run then they'll be able to immediately see the license plate of the person that hit you. But that's not 2011. Today's it's mostly going to be consumer video stuff to feed the YouTube and other Web sites with."

At the end of the day, with PCs and memory sales slowing down, holding the growth back, what's keeping the industry from going negative is the media tablet, smartphone craze, Gartner's Lewis pointed out. "That's the upside. We believe there is enough application growth to counteract the overcapacity situation," he concluded.