This will be followed by the update for June, and I am speaking with Malcolm Penn to find out more!
Executive overview
"At $14.085 billion, March's IC sales were up 28.4 percent versus February, equivalent to plus 2.7 percent on a five-week month adjusted basis. Whilst this still puts the market down 31.2 percent versus March 2008, the momentum that started in January 2009 continues to steadily gain traction.
Overall, the ICs in Q1 were down just 13.4 percent in value, comprising a 19.6 percent fall in units offset by a whopping 7.8 percent gain in ASPs. At the total semiconductor level, sales came in at $17.271 billion, up 27.1 percent on February (1.7 percent on a 5-week month adjusted basis), slightly higher than our $17.019 billion April Report estimate.
Q1 was thus down only 15.7 percent on Q4, sizeably better than our 18.5 percent estimate. This is good news for industry... 'ah but' say the sceptics!
During our January 2009 International Forecast Seminar, we took the view that, from an economic recovery perspective, things would stabilise during the first half of the year, starting to gain traction by the end of 2009, given the dramatic economic stimuli since September 2008. The recovery would then accelerate quite fast in 2010-11, i.e. following a similar pattern as to what happened after the 2000 dot-com crash. There is every reason to believe this will still be the case.
Until recently, the big industry problem was uncertainty but there have been no horrible surprises now for several weeks and things do seem like we are bumping along the bottom. The global economy has stabilised; there have been no new gut-wrenching surprises and the 'unknown unknowns' in the economy have subsided. This means we are now left facing the 'known unknowns', which is clearly something that industry can adjust to and deal with.
Despite its severity, there are also many mitigating circumstances. At the personal level, this recession is quite like no other. For those without a job, or on short-time working, it is clearly bad news as no one is currently hiring. But, those with a job ironically have never been better off, with inflation, mortgage interest rates and repayments (the single biggest expense item on the personal expense budget) at rock bottom levels. This is very unlike the past recessions, which were accompanied by high inflation and cripplingly high interest rates.
Another factor is that no one really knows how much of the current GDP shrinkage (and for that matter the previous five-years above average growth) is (was) smoke and mirrors. With CDIs valued at 1.2x total world GDP in 2007 only to be written down to junk bond status the following year, the absolute GDP and growth rate numbers have been compromised. That makes it hard to judge what they mean from a top down perspective, more so when one considers the total electronics manufacturing industry's contribution to world GDP is barely 3 percent.
Finally, even though cars, mobiles, PCs etc may fall in unit terms by '15-30 percent' this year, that still means '70-85 percent of the market' remains. With inventory levels everywhere in the value chain at all-time lows, we are currently back now building to demand from newly bought components, albeit some 20 percent lower than the 2008 highs.
At the chip level, the market is obviously driven by the economy but it also has its own drivers, especially capacity and ASP trends. Thus, whilst the existence of a link between the chip market and the economy is clear, mathematically the nature of this link is imprecise. Dislocations in growth dynamics are thus relatively frequent.
What then of our January 2009 quarterly growth pattern (Q1 -18 percent, Q2 -2 percent, Q3 +12 percentand Q4 +3 percent)? Clearly Q1, at -15.7 percent, was better than forecast which, if the rest of the growth pattern continues as planned, would rein in the full year market decline slightly from -28 to -25.3 percent, but still within the forecast margin of error. Q1 has thus reinforced, not altered, our January prognostications.
If Q1's stronger momentum however carries through into Q2, Q2 would come in much stronger than our 2 percent decline, say to plus 2 percent instead. This would positively change our forecast dynamics with a further two percentage points improvement on the full year's number, improving our forecast from -28 percent to -23.2 percent. Whilst we are not yet prepared to call for a formal forecast revision, the odds are in its favour and the downside forecast risks dispersed.
Clearly Q1 was the cyclical bottom; from here on out the growth trends will be up. Once the inventory purge is over, excess capacity will soon be absorbed with a corresponding strong recovery in utilisation rates. Given capex is currently at an 18-month all time low, with no near-term correction in prospect until late Q3-Q4 at the earliest, the industry will enter 2010 staring into a new net capacity famine.
We definitely will be revising our 2010 forecast up, from the current +15 percent to the mid-to high twenties.
Industry capacity
The table C1 shows the quarterly semiconductor equipment sales trends for the period Q1-2008 through Q1-2009 inclusive. The total Q1-2009 equipment sales were $3,235 million, down 31.4 percent from Q4-2008, which in turn was down 28.1 percent from Q3-2008. This represents the biggest sequential falls in the history of the chip industry.
Source: Future HorizonsWafer processing equipment represented 76 percent of the total, just slightly higher than its 75 percent average. Total Q1-2009 investment represented only 7.3 percent of the quarterly semiconductor sales, although it must be remembered that an equipment sale in Q1-2009 will not produce incremental semiconductor sales until three quarters later, namely Q4-2009.
Q1-2009 wafer fab equipment sales were down a staggering 69.4 percent on Q1-2008, the fourth consecutive quarterly high double-digit drop, with further declines in the prospect. Capex levels are now running at levels not seen since the early 1990s when the overall chip market was one-third its current size.
As mentioned earlier, Q1-2009 was down 31.4 percent versus Q4-2008, on top of the three previous quarterly declines of 28.1 (Q4 vs Q3), 16.3 (Q3 vs Q2) and 25.8 (Q2 vs Q1) percent respectively. It should not be forgotten that these cutbacks were not triggered by the current chip market recession; the first two quarterly drops, namely Q2 and Q3-2008, took place against a backdrop of strong IC unit growth, i.e., well before the Q4-2008 chip market collapsed.
The cutbacks were a clear intent to engineer tight capacity, a strategy that would by now have bitten home were it not for the cruel interruption on the Q4-2008 market collapse. We have never before seen such an extensive cut back prior to a collapse; ironically this will help the recovery process, albeit for the wrong reasons. It will also underpin the underlying strategy -- post recession IC capacity is going to be tighter than tight.
We also tracked the total semiconductor equipment sales by month since January 1988, both in absolute value and as a percent of semiconductor sales. One significant feature that can be seen from these trends is that the absolute value of the total semiconductor equipment sales has been significantly lower than the previous 1999-2000 investment peak, despite the fact the total semiconductor market has expanded in size.
During this same time period, the investment trend relative to the size of the total semiconductor market has also been trending well below its long-term 16.75 percent average, despite this being a period of heavy 300mm conversion.
The corresponding data for the Wafer Processing equipment sector, shows an increasing trend as a percent of semiconductor sales. This trend, however, is not a sign of excess investment, rather that the wafer processing portion is gaining overall market share, currently at around 75 percent of the total equipment spend, up from around 60 percent in the late 1980s.
We also tracked the total capex spent as a percent of semiconductor revenues on an annual basis since 1990-2008, and data but for the total semiconductor equipment spend. We also tracked the relative relationship between the wafer processing and total semiconductor spends.
These show that a higher proportion of revenues are being spent on the wafer processing sector, a trend that we believe is likely to continue.
We believe that the current levels of capex expenditure are unprecedentedly low and cannot be wholly accounted for improvements in productivity and factory loading. Even if they are, these gains are one-off improvements; once they have been realised there is no more gain in prospect and expenditure levels will return to 'normal' trends.
We tracked the wafer processing equipment spend versus the corresponding increase in capacity on a quarterly basis since Q1-1999 but with the capacity increase delayed by three quarters.
Once the three-quarter slippage in introduced into the equation, the overlay of the two curves, whilst not perfect, is a very good fit. In short, it takes three quarters for increases in wafer processing spend to translate into new capacity. This is the time it takes to hook up and calibrate the kit and make it volume production ready. Add to this an additional one-quarter delay through wafer fab and assembly process, the net result is a one year delay from wafer processing spend to incrementally more IC shipments out.
Adding in a further one-quarter lead-time for equipment delivery, results in a typically 15 month delay for an existing clean room structure from wafer processing investment decision to increased unit sales, one year longer still if a new building is required.
These long lead-times, however, have a positive side in that one has excellent visibility three quarters out into how much additional capacity is due to come on stream, just by analysing the front-end capex spend numbers. Once the frontend
capex is committed, the addition capacity is inevitable, needed or not, the difference being determined by the capacity utilisation number.
One is thus making an investment decision based on a unit demand forecast 12 months down the road, which would not be so problematic were demand more predictable.
As can be seen, however, from the unit sales charts in the Market Summary section of this report, IC unit demand fluctuates violently from its underlying long-term ten percent per year annual growth rate on a month-by-month basis, quarter-by-quarter basis, not withstanding the inevitable -- and unavoidable -- routing inventory adjustments.
The biggest single problem with semiconductor capex is thus both the long time delay from investment decision and additional IC units out and the non-linearity of the month-by-month unit demand. It is this mismatch that gives rise to the investment uncertainty. Getting the investment timing right, however, is not an exact science; there are bound to be ongoing capacity mismatches within this overall favourable trend.
Entering 2009, the current new capacity investment is trending well below the long-term trend, and is projected to slow even more so in 2009 as the economic recession bites home. This means over-investment is not going to accentuate the current industry downturn, as has so often happened before.
This time it seems investment has been deliberately slowed in order to improve the return on capital employed. The seeds have also been sown for the next market shortage in 2010-11. Foundry wafer prices will rise; dust down the 'makebuy' Excel spreadsheets ... the 'fablite'/IDM debate dynamics has yet to run its course."
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