iSuppli to trim semi forecast with weakening pricing, demand
By Ann Steffora Mutschler, Senior Editor -- 3/5/2008
Although the semiconductor growth cycle is entering a period when revenue growth would typically be expected to accelerate, the current cycle is delivering such weak growth, combined with mounting economic worries that market research company iSuppli Corp questions whether the semiconductor industry can regain its momentum and manage to expand this year.
The company’s current forecast calls for the global semiconductor industry to grow revenue by 7.5% this year, up from 4.1% last year.
However, following other market research firms this week including Gartner Inc trimming its 2008 semiconductor growth forecast, iSuppli said it expects to modestly trim its 2008 forecast later this month due to signs of weakening pricing and reduced demand for NAND flash, as evidenced by Apple’s recent slashing of its expected 2008 order levels for the memory and Intel Corp’s financial warning this week.
As the current semiconductor growth cycle hit bottom in February 2006, the semiconductor market normally would be expected to undergo a robust rebound early this year, following the industry’s normal cyclical pattern, but the current cycle is generating so little growth that a strong market expansion is not expected this year, the company pointed out.
However, tighter inventory controls and a limited economic downturn among other factors to keep semiconductor growth positive for the year, according to iSuppli’s Dale Ford, senior VP of market intelligence.
“In the early stage of the expansion, we see the sales momentum return, we see the growth come back and we see companies eager to capture market share. Thus, we have over production and over capacity. Then, later on, the market must bring things back into balance, which leads to a correction,” Ford said in a statement.
At the same time, the inventory situation shows that the industry is currently in a reasonably healthy balance at this point in the semiconductor growth cycle, he noted.
“The last major downturn (in 2001) had a perfect storm of over-build of capacity, a collapse in demand and out-of-control inventory levels. The industry has gone through a learning period on how to manage capacity more tightly. We’re now getting an earlier warning signal for excess inventories. Once there was a signal that inventories were out of balance, the industry responded quickly to get them back into balance. Once the inventories stabilize, we will see a return to balance between production and demand,” Ford continued.
Excess semiconductor inventories in the electronics value chain are expected to fall to the $3.3 billion range in Q1, which will be significantly lower from its peak of $6.1 billion in Q1 2006, while semiconductor makers plan to manage overall factory utilization in 2008 at levels comparable to 2007, to help restrain supply growth and to keep pricing from falling too much for many semiconductor part types, he explained.
Further, Ford reminded that most economists predict the US economy will show either low growth or experience a mild recession this year but will avoid a major recession this year. With global electronics manufacturing growth projected to drop modestly in 2008 compared to 2007, this will limit the negative economic impact on the semiconductor industry.
A maturing semiconductor industry
The lack of a major increase in semiconductor revenue growth momentum reflects a long-term trend in the chip industry toward more restrained expansion, iSuppli believes.
“It’s interesting to go back 20 years and see the shifts in long-term growth rates. Years ago, the global semiconductor market maintained a 27% compound annual growth rate (CAGR), then it slowed to 17%, and now we are in a period of approximately 7% long-term CAGR. These are maturing dynamics. This is a larger and more mature industry—and it’s acting like a larger and more mature industry,” Ford observed.
In terms of whether the semiconductor market can shake off its woes and achieve growth in 2008 will hinge largely upon the industry’s performance in the second quarter, Ford said.
Q1 is expected to be seasonally slow, with revenue declining by 7.5% compared to Q4 2007, with revenue expected to rebound in Q2, rising by 4.6% sequentially.
With flat growth of 0.1% expected for Q4 and an 11.8% increase in the seasonally-strong Q3, Q2 performance will be a key indicator of market momentum for the second half of 2008, he noted.
“This is where the fate of the year lies. Whether the year turns out well or not, [Q2] is the best indication of what will happen this year,” Ford concluded.
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