Demand surge expected in second half, IC Insights says

IC Insights says strong demand will return starting in the second half and advises semiconductor companies to avoid adjusting adjust their businesses, especially with regard to personnel cuts, to run at Q1 levels.

By Suzanne Deffree, Managing Editor, News -- Electronic News, 4/10/2009

"Think quarterly, not annually" is becoming IC Insights new mantra. The research company this week echoed statements it made in December 2008, advising chip companies to look at business on a quarterly basis, not solely on an annual basis, when planning for an economic recovery and their 2009 use of resources.

According to IC Insights' update to its 2009 forecast, released Thursday, the "perfect storm" of negative factors that have damaged business in the first half of 2009 will bring about a much more "friendly" environment for the IC industry in the second half of the year.

"The second half of this year is expected to yield seasonal increases in PC, cell phone, and consumer electronic system sales, as well as a jump in IC orders due to inventory restocking," IC Insights President Bill McClean wrote in a statement on the update. "Moreover, the global economy is forecast to transition from negative to positive growth in the second half of 2009. IC Insights believes that three important positive forces that are likely to drive positive growth in the worldwide economy later this year are still in place."

The company made note of the more than $2 trillion in worldwide economic stimulus due to be spent over the next two years; record low interest rates in the countries including the US, the UK, and South Korea; and low oil prices.

"In IC Insights’ opinion, global recessions cause pent-up demand for electronics," McClean wrote. "With a strong electronic systems and semiconductor industry rebound following every one of the past four global recessions over the last 30 years, there is good reason for optimism. Moreover, IC Insights believes that a similar 'global recession-rebound' will once again be evident in 2010 and 2011 with the semiconductor market registering double-digit growth in each of these years."

On that, the company is forecasting 15% growth in semiconductor market revenue in 2010 and 19% growth in semiconductor market revenue in 2011. (See chart below.)

"In glaring contrast to other forecasters that do not expect the IC market to reach the 2007 level at anytime over the next five years, IC Insights believes that … the worldwide IC market will surpass the 2007 level in 2011," McClean said. "In IC Insights’ opinion, given the extreme and unprecedented cutbacks in IC industry capital spending in 2008 and 2009, a surge in IC average selling prices (ASPs) in 2010 and 2011 is almost guaranteed. This surge in IC ASPs will be the driving force for double-digit growth in the IC market over the next couple of years."

According to IC Insights' data, Q1 IC unit shipments were at Q2 2005 levels. The company said that it believes first-half IC unit shipments are now running far below the current weak underlying electronic system demand.

The company also noted the "drastic" capital spending cutbacks now being made and said such actions will have an impact on the IC industry over the next couple of years, especially with regard to ASPs. The company's estimated semiconductor industry capital spending as a percent of sales will hit an all time low of 12% in 2009.

"The severe Q4 2008/Q1 2009 IC inventory burn has caused IC users to cut their order rates to extremely low levels," McClean said. "These levels are far below what is needed to sustain future electronic system requirements."

IC Insights noted that with Q1 200-mm fabrication facility utilization at only about 50%, IC manufacturers are continuing to close 200-mm fabrication facilities at a brisk pace. "However, Q1 300-mm IC facility utilization was still running at a fairly healthy 80%. IC Insights believes that any surge in leading-edge IC unit demand (MPUs, DRAMs, flash memory, etc) will very quickly push 300-mm IC fab utilization to 90%, or greater," McClean said.

Further, IC Insights reminded that electronic system sales are highly seasonal, with the second half of the year typically much stronger than the first half for systems such as PCs, cell phones, and consumer electronics. IC Insights forecast that second half 2009 IC unit shipments will be at least 20% greater than in the first half of the year.

"Given such dramatic quarterly rebound expectations for the remainder of 2009, IC Insights believes that semiconductor companies should not adjust their businesses, especially with regard to personnel cuts, to run at Q1 levels," McClean said. "Unpaid leave, salary cuts, etc, may be the best approach to bridge the gap between today’s extremely weak level of business and the expected second-half 2009 recovery."

McClean continued to state that in IC Insights’ opinion any annual forecast for 2009 should automatically be broken down into quarters.

"By doing this, an entirely different, and much more encouraging, perspective on the expected business activity for the remainder of 2009 is likely to be revealed," he said.

"IC Insights believes that a rebound in the IC market will begin in the second half of this year. Spurred by pent-up electronic system demand and increasing IC ASPs, the IC market is forecast to register double-digit growth in 2010 and 2011—surpassing the 2007 level in 2011," McClean concluded.