Second half foundry biz to slow, Gartner reports

Gartner notes that after a reasonably good Q2, foundry business momentum has begun to show signs of weakening and although growth is still expected in Q3, the estimated rate of increase is not as high as what most of the market players had anticipated earlier in Q2. Although Gartner had forecast that the foundry industry would gradually slow in the second half, the recent market outlook guidance by the top few foundries revealed that the severity of the downturn has intensified.

By Ann Steffora Mutschler, Senior Editor -- Electronic News, 8/5/2008

In the last week of July, the four largest dedicated foundries released their Q2 earnings results with TSMC, UMC and Chartered Semiconductor posting positive quarter-over-quarter sales growth of 4.7%, 5.4% and 16.5%, respectively, while SMIC registered a sequential decline of 5.4% in Q2 as the company exited the commodity DRAM business, which was one sign that that foundry business momentum – like the DRAM business – was beginning to show signs of weakening, according to market researchers at Gartner Inc.

At the same time, Gartner noted that demand from the consumer and, to a certain extent, the communications segments, when compared with the PC segment, had shown greater strength and resilience during the Q2 uptick.

Gartner pointed out that while TSMC, Chartered and SMIC are expected to grow in the mid-single-digit range in Q3, UMC expects flat growth or a low-single-digit decline in Q3. Also in Q3, demand from the communications segment, particularly the wireline and wireless networking ICs, is expected to remain strong, whereas handset and baseband applications will start to weaken slightly. Further, demand from game consoles and set-top boxes in the consumer segment are also expected to demonstrate strength, followed by, to a lesser extent, graphics and chipsets from the PC sector.

"After a reasonably good second quarter, the foundry business momentum has begun to show signs of weakening. While growth is still expected in the third quarter, the estimated rate of increase is not as high as what most of the market players had anticipated earlier in the second quarter," noted Gartner analyst Kay-Yang Tan, in a statement.

Table 1 summarizes the top four foundries' Q2 earnings/guidance and first half market share:

In its analysis, Gartner noted that after a reasonably good Q2, the foundry business momentum has begun to show signs of weakening and although growth is still expected in Q3, the estimated rate of increase is not as high as what most of the market players had anticipated earlier in Q2. Although the company had forecast that the foundry industry would gradually slow in the second half, the recent market outlook guidance by the top few foundries revealed that the severity of the downturn has intensified.

Gartner also reminded that in June, the impact of the general market weakness was first encountered by a few smaller foundry players, whose 8-inch fabs were observed to be no longer "loaded as tightly" as before, and in the second half, orders have waned drastically as the global economy continues to sag as a result of the US subprime lending crisis, record-high oil prices and an increasing risk of entering stagflation. In fact, most of the fab loading plan, including the leading edge, was reported to have been cut back rigorously from September, thereby lowering the overall Q3 growth projection significantly.

This year’s growth pattern is similar with the trend exhibited in 2004 and 2006 — whereby the Q3 growth was considerably lower than the Q2 growth rate — but the reason for the recent slowdown is different, Gartner observed. From the beginning until the end of the first half, the inventory in the value chain had reportedly been kept at a well-controlled level, as foundries and their customers consistently exercised strict discipline in their loading plan. The present slowdown is therefore attributed to just the demand-induced phenomenon, with no concerning inventory issues built up in the pipeline, Gartner said.

Although the current situation is considered to be better than 2004 and 2006, the great uncertainties lingering in the macroeconomic picture, however, have led to the present visibility, and the visibility into the Q4 is especially cloudy and volatile, and with fluctuating demand worries and rising concerns that the lackluster market sentiment will further curtail consumer spending and end-market demand, the possibility of slower revenue growth occurring in the first half of 2009 remains high, the company continued.

Still, despite the slower-than-anticipated second half, Gartner’s view of the foundry industry remains positive for 2008, with the foundry revenue growth expected to strongly outpace the overall semiconductor market in 2008, and based on the latest companies' Q2 earnings releases and guidance into Q3, the company revised its foundry sales revenue growth to approximately 13% in 2008, down slightly from its previous forecast of 14.8%.


This analysis is part of Gartner Dataquest's Semiconductor DQ Monday Report, Issue 30.