iSuppli lowers semi forecast to 3.5% growth, remains optimistic

By Ann Steffora Mutschler, Senior Editor -- Electronic News, 9/26/2007

Although chip revenue is up, the memory industry is improving and the outlook for electronic equipment markets is on the rise, El Segundo, Calif.-based market research firm iSuppli Corp. has reduced its forecast for global semiconductor revenue growth this year to 3.5 percent, down from its previous prediction in June of 6 percent growth.

The firm noted that the stronger conditions in the second half of the year will not be sufficient to completely offset the impact of the first half’s weakness, which is what prompted iSuppli to downgrade its forecast.

Global semiconductor revenue now is expected to reach $269.9 billion this year, up 3.5 percent from $260.6 billion in 2006.

Global Annual Semiconductor Forecast (revenue in billions of U.S. dollars)

Source: iSuppli Corp., September 2007

iSuppli started the year off more optimistically with a 10.6 percent growth rate, then made its first cut to 8.1 percent in April, along with other market research firms that have not been quite as positive about growth for the year.

The Semiconductor Industry Association has whittled its 2007 forecast down to 1.8 percent for the year -- a significant drop from the 10 percent growth rate it predicted in February.

Other market research firm have made similar reductions in outlook for this year.

According to iSuppli, in the first half of the year, global semiconductor revenue declined by 6 percent compared to the second half of 2006, limiting the full-year market growth potential.

Gary Grandbois, principal analyst with iSuppli said that the major cause of the first-half semiconductor industry weakness was a 13 percent sequential decline in revenue during the period for memory ICs, led by DRAM and NAND-type flash, whereby the memory revenue decline was spurred by a drop in average selling prices (ASPs), which in turn was caused by a glut of parts on the market.

At the same time, the second half is bringing a revival of growth that comes from the normal year-end seasonal strength as well as from a surge in memory IC prices and revenue with a stronger end-equipment market.

iSuppli expects global semiconductor revenue will rise by 10 percent in the second half compared to the first, marking a major turnaround in market conditions with semiconductor revenue to rise by 9.8 percent sequentially in Q3 and by 4 percent in Q4.

Memory IC revenue is expected to rise by an impressive 15 percent in the second half compared to the first as ASP erosion is dulled and the holiday season commences, bringing stronger sales of PCs.

With memory accounting for 23 percent of total semiconductor revenue this year, this will have a major impact on the overall chip market, iSuppli believes.

DRAM suppliers in the first half increased manufacturing at a rapid rate, which caused bit shipments to rise by 94 percent this year, compared to the industry average of 55 to 60 percent annual growth; this oversupply caused a decline in memory prices that severely impacted the entire semiconductor market.

In Q3 however, DRAM suppliers began slowing production growth, which promoted pricing to stabilize, and even rise in July.

While DRAM pricing has since softened, the market is still much stronger than it was in the first half: After declining by 10 percent and 23.8 percent sequentially in Q1 and Q2, respectively, iSuppli expects DRAM revenue to rise by 20.8 percent rate in Q3, but remaining flat with a marginal 0.2 percent decline in Q4.

In comparison, NAND flash market recovery has been more dramatic in Q3 as prices for NAND are expected to increase, contrasting the 40 percent decline in per-megabyte prices in Q1. Following a 20.6 percent plunge in sequential revenue in Q1, the NAND market recovered partially with a 14.7 percent rise in Q2. Conditions have improved in Q3 with an expected 37.5 percent rise to be seen, to be followed by a 6.5 percent increase in Q4.

Due to stable second half pricing conditions, both DRAM and NAND markets are expected to grow by 2.5 percent and 15 percent this year, respectively with the resurgence to have legs: memory revenue growth should continue into 2008, and total semiconductor revenue expected to rise by 9.3 percent next year.

Finally, while iSuppli’s 2007 semiconductor forecast has declined, the outlook for shipments of electronic equipment using those semiconductors has improved. The firm has raised its forecast for electronic equipment revenue growth to 6.8 percent this year, up from 6 percent previously. Of the six major electronic equipment segments, five (data processing, wireless communications, wired communications, consumer electronics and automotive) have been upgraded by iSuppli, while industrial equipment was not upgraded.

These positive developments are likely to ripple into 2008, with electronic equipment revenue expected to rise by 7 percent for the year, up from the previous forecast of 6.4 percent, the firm concluded.