Semiconductor forecast is nervously optimistic, InStat says

InStat enabling technologies research director Jim McGregor gave an optimistic forecast for the semiconductor industry this morning, but it almost seemed as if he were looking over his shoulder as he spoke. On the positive side, he suggested that strong single-digit growth in revenue would continue through 2008 and maybe early 2009. Interestingly, he sees this happening despite a slowdown in unit shipments this year. He thinks average selling prices, which historically have almost always declined year-on-year, will strengthen enough to make up for the slip in unit sales.

The places where McGregor expects unit growth are in themselves interesting. Like pretty much everyone, the analyst expects strong demand in consumer electronics—by which he means primarily mobile convergence devices—and in automotive. Unlike more skeptical analysts, he also sees big growth—24 per cent cumulative annual rate—in the still poorly-defined digital home market. This category includes pretty much everything that goes into a house, consumes electron momentum and has gates in it: from HDTVs to Bluetooth thermostats.

But McGregor is also positive on less popular markets. One is the digital office, where the analyst sees lots of growth opportunity beyond the current plethora of PCs, servers, routers, peripherals and voice services. Another is the personal computer business. In fact McGregor started his talk by dismissing the maturity of the PC market as a myth.

Pointing out that the Internet has only achieved 15 per cent market penetration globally, McGregor said that particularly in emerging global markets the PC still has a long way to go, albeit at very low prices. But he also argued that the trend toward handheld everything was drawing PC manufacturers—at least the innovative second-tier manufacturers—into the ultra-mobile PC market. The latter is apparently the new euphemism for now-discredited terms like palmtop and pocket PCs. He also argued that the more conservative first-tier suppliers were beginning to change. Dell, which has always depended entirely on outside reference designs and manufacturing, is actually hiring engineers at two locations, he said.

There was caution in the fine print, however. McGregor primarily cited three factors that could threaten his mildly rosy outlook. One was the risk of delay in standards that are necessary for connectivity, data exchange and interoperability. The latter point McGregor underlined by saying that a single applications execution environment was essential, making the difference between potential 25 per cent annual growth and 5 per cent in the mobile and home markets. “We can do anything in hardware,” he said. “But we can’t wait five or ten years for a portable software solution. Somebody has to have the courage to declare war on Microsoft.”

The second risk was digital rights management, which McGregor, like many other analysts, sees as having the power to stall the entire market built around digital media. It is a problem created by the content providers, and it can only be resolved by them coming to their senses, he implied.

Finally, there was the fact that semiconductor cycles are inextricably tied to global economic cycles. Here McGregor was officially sanguine and personally nervous. “There is today no sign of a significant economic downturn in the near future,” he declared. But he followed this pronouncement with a worry.

“Consumer credit in the US concerns me most. Historically, mortgage defaults peak three years after the loans are issued. For the low-rate adjustables and sub-prime loans written during the real estate boom, that date would be 2008. Add to that the huge debt loads people here are carrying on credit cards, autos and other short-term obligations. If the global economy is going to break, I think it will start with personal debt in the US.”

And with that cheery thought, enjoy your Christmas shopping!