Q2-09 chip market shows 18 percent growth: Mid-year semicon update

Here are the excerpts from the Global Semiconductor Monthly Report, July 2009, provided by Malcolm Penn, chairman, founder and CEO of Future Horizons.

Following hot on the heels of April's 16 percent month-on-month sales growth, May grew a further 0.9 percent sequentially, putting June on track to break through the $20 billion barrier, for the first time since the chip market collapsed last September.

"Psychologically this will give everyone a shot in the arm," commented Malcolm Penn. "Second quarter growth is usually pretty pathetic; there have been only three historical precedents when such a spurt has happened. The big question now is: Is this the start of the chip market recovery or is it merely a blip on the statistics radar screen?"

"It's both," Penn counselled. "The fourth quarter market collapse was far too steep -- a severe over-reaction to last year's gross financial uncertainty -- culminating with the Lehman Brothers collapse in September. The first quarter saw this stabilise with the second quarter restocking, but there are other positive factors also in play."

The normal dynamics following any market collapse is: (1) over-reaction, cutting back production and inventories too far, (2) a correction phase to rebalance over-depleted inventories, and (3) a resumption of demand-driven built.

"Whilst in Phase 1, chip sales equals OEM requirement minus inventory burn, hence understating real demand, Phase 2 results in sales equal to OEM demand plus inventory rebuild, thus overstating the actual demand," continued Penn. "We are currently in Phase 2 of the recovery cycle."

Underlying issues
Commenting on some of the other underlying issues, Future Horizons believes that the timing of this recovery is 'as good as it gets', given that third quarter seasonal demand will be on the increase just as the sales decline caused by inventory build ends.

Capacity will also shortly start to come into play, given the unprecedented three years of fab under-investment. Traditionally tight availability positively impacts IC ASPs, but delayed by 12 months as existing contracts run their course.

This time, Future Horizons believes things could be faster, given the extent of the cutbacks, as already witnessed in the 2009 memory market.

"This (under-investment) eagle is one day coming home to roost," warned Penn. "We are already seeing the first signs of shortages at UMC affecting Xilinx and other firms second quarter sales. And for shortages read ASP increases, it's inevitable, it's just a matter of time, the fabs will be looking to maximise the return on their costly and precious resources, especially now more and more firms are seeking their share of the foundry pie. Better to pay 5x the price and get the parts you need."

On the cautionary side, the overall economic outlook remains uncertain and moribund, and firms are still in a wait-and-see mode, which ironically will only serve to make the market dynamics worse, as firms are then faced with a massive catch-up problem.

"Never forget market trends are not based just on rational decisions, but emotional ones as well, it is this that makes the outcome sometimes so difficult to predict," Penn reminded.

I hope to get into further conversation with Malcolm Penn on this recovery or blip!