Semiconductor industry dynamics will get worse before getting better
By Ann Steffora Mutschler, Senior Editor -- 6/23/2008
Judging the health of an industry can be complex. For the semiconductor industry, one indicator is the amount of manufacturing equipment sold, which fell by 37% year-over-year in North America for the month of May. While some market research companies had been expecting sales to pick up in the second half of the year, there are macro-economic issues at play that suggest otherwise.
Industry association Semiconductor Equipment and Materials International (SEMI) reported last week that orders for semiconductor manufacturing equipment continued sliding downward, approaching levels seen in 2005 – the last time the semiconductor industry reported a year-over-year decline – as North America-based providers of semiconductor manufacturing equipment posting $1.03 billion in orders in May on a three-month average basis.
Danely reminded that semiconductor industry revenue grew at a 9-year CAGR of 13% between 1990 and 1999, but growth has since slowed to a 5-year CAGR of 10% between 2003 and 2008 (estimated). Comparatively, the US GDP grew at a CAGR of 5.3% between 1990 and 1999, and 4.9% between 2003 and 2008 (estimated).
Between 1995 and 2008 (estimated), semiconductor industry revenue grew at a 13-year CAGR of 5%, while the US GDP grew at a CAGR of 5.1%.
On a unit basis, semiconductor industry units have grown at a 9-year CAGR of 9% between 1990 and 1999 and have accelerated to a 5-year CAGR of 11% between 2003 and 2008 due to increasing semiconductor apps in consumer electronics. At the same time, ASPs rose at a 9-year CAGR of 3% between 1990 and 1999 but have declined at a 5-year CAGR of -1% between 2008 and 2008 mainly due to pricing pressures from the consumer end market.
As such, Danely expects lower, but still good, growth for the industry.
Interestingly, he also believes semiconductor companies should be run more like “normal” companies [i.e. Philip Morris] and less like growth companies [ala Google]. Specifically, changes are needed in order to create shareholder value, namely more dividends, less operating expenses, and increased focus on cash management.
Although he believes the worst is over, he acknowledged that it is hard to get excited as demand is lackluster. Coupled with that, margins are not attractive but valuation is seen to be OK for 2009. While inventory is no longer excessive, it is definitely not too low either – all of which boils down to another year of so-so returns, Danely concluded.
Speaking of demand, during the same Churchill Club event, Dan Niles, CEO of Neuberger Berman Technology Management, a subsidiary of Lehman Brothers, asserted that a true picture of end user demand for the year is not clear, making it is difficult to rely on forecasts.
While the government stimulus checks are boosting consumption, once they are spent, the picture will be clearer as to what consumer spending may be. Because of this, Niles said there is reason to worry about a recession occurring late this year or early next year.
Compounding matters of a murky demand picture is the skyrocketing price-per-barrel of oil, higher food and consumer goods prices due to rises in transportation costs and, of course, the housing crisis. “The inventory of unsold homes is the underpinning of all the problems we’re having,” Niles noted.
Add to that income volatility, which leads to economic insecurity and the consumer sentiment index falls.
The global economic environment comes into play as well. As economic growth stalls around the world, semiconductor growth will stall as well, he said.
Niles also observed that emerging markets are not doing as well as expected, and pointed to PC makers Acer and Lenovo, both of which posted less than stellar Q1 financial results.
In addition, the handset market in China is slowing, according to Longbow Research semiconductor analyst Tayyib Shah, based on a June survey of mobile phone retailers in the US and China that shows the US market rising and the Chinese market flattening.
“China’s flat month-over-month sales number is a sign of weakness in that growing market which had seen near double-digit sequential. In the US the average was driven up by a number of contacts at Best Buy who reported a month-over-month sales increase of over 25%. If we strip out the numbers reported by our Best Buy contacts, the remaining US contacts reported a 3% month-over-month increase in sales,” Shah offered, in a statement.
Shah said these trends support the 2% quarter-over-quarter decline in National Semiconductor’s handset revenues that he is projecting for the company’s fiscal Q1 2009 (ending August).
The handset trends in China are attributed to macroeconomic concerns over a slowing economy, a high inflation rate, and the recent earthquake. In addition, China shortened its May Labor Day holidays to three days this year from seven days last year, which Shah believes dampened handset sales.
As if that weren’t enough, last Friday, the Dow Jones Industrial Average dropped more than 200 points, tamped down by another steep decline in financial shares and a big rebound in crude-oil prices, according to the Wall Street Journal. Trading ended below the 12000 mark for the first time since March 17.
In the end, there is no way to know how 2008 will wrap up for the semiconductor industry until a clear picture of consumer demand can be had – since that segment drives so much of the industry’s activities. One thing is for sure, the industry is in for a bumpy ride until then, with conditions likely to get worse before eventually improving.
While all the bad news can get oppressive, thankfully during the Churchill Club event, Sangeeth Peruri, managing director of J. & W. Seligman & Co. reminded that the great thing about the semiconductor industry is Moore’s Law, which drives constant innovation and new opportunities for growth.
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