Inventory to Drive 2005 Downturn

By Jessica Davis -- 9/24/2004

SUNNYVALE, CALIF -- The current semiconductor cycle has hit its peak in 2004, and 2005 will be the first year of a two-year downturn.

That's according to the most recent forecast by analyst firm IC Insights. The firm delivered its forecast and analysis at a forum here.

The overall semiconductor market will grow by 29 percent this year to $214.1 billion, and then will decline in 2005 by 4 percent to $205.5 billion, according to Bill McClean, president of IC Insights.

The integrated circuit market, which doesn't include discretes, sensors or optoelectronics, will grow by 27 percent in 2004 and will experience a 5 percent decline in 2005.

"Our hands are pretty much tied on the 2005 forecast," said McClean. "We think it will be the correction year of the cycle."

The semiconductor equipment market will fare somewhat better, with a 56 percent increase this year to $34.5 billion, and a 7 percent increase next year to $36.9 billion.  The semiconductor materials market is experiencing 16 percent growth this year to $27.0 billion and is expected to decline by 3 percent next year to $26.2 billion.

New competitive pressures from China and India have pushed the industry into a competitive pricing environment. 

McClean pointed out that the worst cycles for the industry have included inventory burns and worldwide recessions. For example, the downturn of 2001-2002 was driven by a worldwide recession, inventory burn, overcapacity and system sales decline.  Five of the six industry cycle downturns have been accompanied by worldwide recessions, McClean noted.

But no economists are predicting a worldwide recession this time around, McClean said, and that's good news. The bad news is that the industry is poised for an inventory burn, and those downturns driven by inventory burns have been some of the worst – 1985 and the most recent downturn.

"If the upturn is unit-driven instead of ASP-driven [average selling price], that's when you run into problems and that's what has happened this time," McClean said. 

The quarterly IC unit shipment volume trend line now is eerily mirroring the one we saw in 2000. "There is a problem here, but it's not as bad as in 2001," McClean said.

High IC unit shipment in 2004 has put pressure on average selling prices.  While the IC market unit volume increased 25 percent from 2000 to 2004, the IC market in dollars only increased 1 percent over that same period.

"So we're busy, but we're just not making a lot of money," McClean said.

In 2000 the industry experienced a 7 percent increase in ASPs, and McClean expects this year will be about the same.

"Since 1995, not even in a boom year, are we seeing a big growth in IC ASPs," he said. "That's frustrating and not a healthy situation for IC manufacturers"

High oil prices and a post-election year economics will also contribute to a down year for the chip industry in 2005.  IC Insights is forecasting a GDP of 3.0 for 2005, down from the 4.5 percent the world enjoyed in 2004. But unlike 2001, the downturn that's coming won't be nearly as long or as deep.

"We think industry will start to recover in 2006," McClean said. 

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