Thursday, March 18, 2010

Currently profitable global semicon industry needs to remember lessons of downturn!

Early this week, iSuppli reported that the global semiconductor industry is currently at its ‘most profitable level in a decade.’ So, I asked iSuppli whether it was too early to call the semicon industry most profitable, given that we’ve survived the worst downturn and the fact that lot of capacities are being built up? However, this is indeed a noteworthy performance.

According to iSuppli, ‘The overall semiconductor supplier operating profitability rose to 21.4 percent in fourth quarter of 2009, the highest level since the fourth quarter of 2000 when it reached 24.7 percent. Industry profitability soared in 2009, rising throughout the year after falling to negative 5.3 percent in the first quarter due to the impact of the global economic downturn.’

In a quick chat, Derek Lidow, president and CEO of iSuppli, said: “The semiconductor industry profitability is likely to improve further from this point as fab utilization rates improve and also because prices have been going up recently due to spot shortages and long leadtimes. So, we do not think this is too early to congratulate the industry on a job well done.”

So far firms have done a great job in checking against overcapacity situations. How long, before we all get greedy all over again? (LoL) And well, the whole thing starts! Crisis has led to newer styles of management — so, have the firms really learned?

Lidow added that the industry executives have demonstrated more restraint on capacity additions than in any previous recovery. “Indeed, the slowness to add assembly and test capacity has lead to the spot shortages, that the industry has then used as a reason to increase prices. This has further re-enforced the benefits of being more cautious on major capacity increases.

“Another noteworthy factor in this restraint is that a larger proportion of all semiconductors are being produced from wafers fabricated at independent foundries. With such a high concentration of production going through relatively few foundries, the industry is much better able to balance wafer supply and demand – and, again there are fewer incentives to add capacity speculatively.

“Of course, the memory producers have been the most prone to add speculative capacity in the past and in this cycle the major memory producers have been in weaker financial condition, Samsung excepted, than ever before, so they have been ‘constrained to be restrained’.

Has the industry learned its lessons?
The key question remains: Has the industry really learned its lessons from the past year?

Lidow said: “The semiconductor industry has learned, the question is whether they will remember the lessons! The industry has learned that when capacity is added slowly, pricing is better. They have learned that often OEMs, their customers, are willing to reduce margins on their TVs and cell phones in order to keep up consumer the demand, and that the semiconductor supplier can keep some of the benefits of their economies of scale and still keep the industry growing.”

Finally, with all these signs of recovery, are the VCs now taking some interest in the senicon industry or is it still out of bounds?

Lidow’s reply is interesting. He added: “VCs have started to come back, but with more semiconductor companies than ever (the downturn did not stimulate any meaningful industry consolidation!), the criteria for investing in a new semiconductor startup are higher than ever.”

Thanks a lot, Jon and Debra.

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