Semiconductor Outlook And Review - Apr. 2010 - Industry Outlook

The Semiconductor Industry serves as a driver, enabler and indicator of technological progress. Developments in the industry determine the way we work, transport ourselves, communicate, entertain ourselves and respond to our environment. The PCs we work on, the cars we drive, the phones we communicate with, the electronic gadgets on which we watch movies, listen to music and play games on, and the planes and weapons used to transport or protect us use semiconductor devices.

As environmental issues have become more of a concern today, semiconductor devices are being made to reduce power consumption, reduce heat dissipation, capture solar energy, create more efficient lighting solutions and so forth.

The industry has come a long way since the last downturn, when most of the players streamlined operations and transferred more routine production to low-cost locations. This led to the development of the Asian market, where most memory production and backend operations have shifted.

Lesson Learned in the Industry

Past experience has been put to good use this time around. When the recession hit in late 2008, semiconductor manufacturers cut production drastically instead of running the fabs at full capacity to maintain margins and hoping that the recession would blow over. As a result, there was no excess inventory that had to be burned off when demand started returning. There was instead a shortage in some cases, which led to stronger pricing.

As a result, the industry performed much better in 2009 than was originally anticipated. According to the Semiconductor Industry Association (SIA), worldwide sales of semiconductors were $226.3 billion in 2009, significantly better than the $219.7 billion forecasted for the year. This was a 9% decline from 2008.

The SIA estimates that around 52% of revenue came from the Asia/Pacific region (excluding Japan), followed by Japan and the Americas with a 17% share each, and the balance from Europe. The sales by geography were similar to 2008, indicating that the recession did not result in any major change in market dynamics.

The SIA attributed the better-than-expected performance to much superior inventory management than in the prior downturn, new product launches and strength in the consumer and PC markets toward the end of the year. These two end-markets together consume around 60% of total semiconductors sold.

Expanding Reach in Computing and Consumer Markets

The computing market is characterized by commoditization and corresponding pricing pressures that have made it a lower-margin business. As a result, a number of chip companies have shifted focus to other areas.

However, while it is true that the market is relatively mature and recession-impacted, there are some encouraging signs for 2010. The first is a revival in enterprise spending, which is being driven by new product cycles and some pent-up demand. The second is the server refresh cycle, growth of cloud computing and virtualization, and changes in data center operations. The third is the strength in mobile computing platforms (although some of the latest models of netbooks, tablets and MIDs are treated as consumer items).

The consumer electronics market is growing in importance, especially gadgets such as LCD TVs, Blu-ray players, smartphones and netbooks. The problem with this segment being a major driver of revenue is its inherently low margins. Competition is fierce and aggressive pricing is the rule of the day. Since semiconductors made for consumer goods are in the nature of components, there is ever-increasing pressure on their prices that correspondingly squeeze margins.

According to the Consumer Electronics Association (CEA), the 7.8% revenue decline in consumer electronic goods for 2009 was entirely on account of weaker pricing, as unit volumes of consumer goods increased around 10%.

However, the CEA is optimistic about slight growth in 2010 to $165 billion. The primary driver will be smartphones, which are expected to generate $17 billion in shipment revenue and 52 million in units. Notebooks will be the second largest driver, with shipment revenue of $14 billion and units of 30 million.

Blu-ray player units, which increased 155% in 2009, are expected to grow to more than 7 million units and generate $1.4 billion in shipment revenue. And finally TVs, which grew significantly in 2009, are expected to grow again in 2010 to 37 million units, driven by high definition, FPD and other advanced technologies. However, shipment revenue is expected to decline to $22 billion due to weaker pricing.

Other Markets

Communications infrastructure spending is currently being driven by China and India and the SIA expects infrastructure spending in these geographies to remain the major driver of semiconductor sales into the market. The domestic market will be driven by increasing data volumes. Medical Devices is an upcoming area and some chipmakers have started developing products targeted at this market as well.

The recovery in the automobile market is slow, with several of the large companies facing temporary issues and growing inventories. The longer-term prospects remain bright, since design activity is strengthening. Moreover, semiconductor manufacturers serving this market have a few advantages. The most important is the growing electronic content per vehicle, driven by the need for fuel efficiency, entertainment and automated navigation.

As a result, semiconductors serving this market should grow stronger than the industry over the next few years.