May 2010 global semicon update: Four quarters of sequential growth, yet still no one believes! Wake up, says Future Horizons

Here are the excerpts from the Global Semiconductor Monthly Report, May 2010, provided by Malcolm Penn, chairman, founder and CEO of Future Horizons. There are a lot of charts associated with this report. The report also covers market trends. Those interested to know more may contact Future Horizons.

March’s total semiconductor sales came in at $26,533 billion, slightly above our February expectation, closing the quarter at $69,181 billion. This was up 2.8 percent over Q4-2009 and one of the strongest first quarter performances ever in what is normally a negative growth quarter. We have now had four straight quarters of industry growth, yet still no one believes in the strength of the recovery.

Of course, something unexpected can always go wrong but the industry fundamentals have never been better aligned. Just as 2001 ushered in the conditions for the so-called the perfect (semiconductor) storm, 2010 is now wallowing in the inverse effect. Surprisingly, few firms are tough. Most are too timid, too cautious or too scared. Welcome to the brave new world of semiconductor company ambivalence and life-threatening risk aversion. “Hello”.

Future Horizons presented its review and forecast for the global semiconductor market on the first day of their ongoing 19th International Electronics Forum (IEF) 2010 in Dresden, Germany, May 6-8. Our overall prediction was that the 2010 chip market would have a barnstorming year; only a disaster of the Lehmann Brothers scale could now derail the market.

The overall five-year forecast presented was:
* 2010: +31 percent, with still some scope for upwards revision.
* 2011: +28 percent; based on: peak of the structural cyclical boom (could stretch into 2012).
* 2012: +18 percent; based on: normal cyclical trash cycle starting 2H-2012 (1H-2013?).
* 2013: +3 percent based on: market correction in full flow (could be negative, cap ex overspend and inventory build depending).
* 2014: +12 percent; based on: start of the next cyclical recovery (single digit, if 2013 is negative).

This would take the industry to around $300 billion in 2010 with a CAGR of 11.8 percent between 2010-14. It would also signal a 180-degree reversal in the industry’s fortunes following its ‘zero growth’ 2000-09 lost decade of growth. Moreover, despite the apparent bullishness of these numbers, given the now unavoidable 2010-11 fab shortage, the growth upside for 2010-12 is still huge.

The real tragedy however of what ought to have been good news for the industry was: (a) still, no one believes in the numbers; and (b) it was entirely predictable.

We first presented this forecast in January 2009, at the high point of the industry’s economic and business uncertainty. The only change we have made in the last 17 months was to increased 2010’s growth number from 15 to 31 percent number. Whilst all other industry analysts, business leaders, trade associations and economists alike wrestled with what was happening, we alone never lost faith in the industry or what the underlying fundamentals were saying.

This cycle’s forecast was the easiest we have ever had to make. All we had to do for the IEF meeting was to adjust for the fact that the 2009 recovery was faster and steeper than even we had dared to predict. The bottom line? The industry fundamentals may often get distorted by events but they never lie, ignore them at your peril.

We were ridiculed for our optimism in January 2009 and throughout the year when we stuck to our guns. We never stopped believing in the numbers however and never subscribe to industry fashion, trend or sentiment, despite this sometime being out on a limb with industry consensus. We are proud of the fact only we got this analysis right, but equally sad that no one had the courage to listen. This was not forecast luck either; this was simply doing what we do best, making a considered analysis and then believing in what the forecast tells us.

Just to recap then on these industry fundamentals, before the 2008-09 collapse the chip market was in remarkably good shape with negligible inventory, increasing ASPs, low levels of Cap Ex and tight fab capacity.

With the global economy – albeit fragile and vulnerable – now recovering, the industry has started its recovery with shortages and all of the other aspects still positively aligned. It simply does not get much better than this, but despite what the numbers say, “Ah but” is (still) driving the industry consensus … still no one looks too far beyond the next quarter!

Granted economic uncertainty remains the biggest short-term risk, not helped by the fact that the global financial system remains fundamentally flawed. One cannot however run a business based on what might go wrong with the economy. You need a plan for growth with ‘Plan B’ if the worst-case scenario then happens. Top of the industry’s paranoia and fear, uncertainty and doubt (FUD) factors, largely due to a pandemic the loss of collective confidence following ‘five bad years’ of industry growth and pandering to Wall Street’s greed, fickleness and quarterly reporting bullying, are:

* Is unit demand overheating or sustainable?
* Is inventory starting to get out of control?
* Will the economy slip back into recession?
* Is the capacity crunch a blip or more fundamental?
* What will happen to the economy when the stimulus funding dtops?
* Will the end market demand hold up or slip back?

Yet, such risk aversion is not risk management. As recessions draw to a close, few are ready to believe that it is over, exaggerating the catch-up reactions, amplifying the cycle peaks and troughs. By treading water in fear of a 2H-2010 dip, the industry will simply exacerbate the next trash cycle. By the time the industry waits for 2010 clarity (September?), it will be too late to rescue 2011.

As we have constantly mentored, the industry fundamentals - economy, unit demand, fab capacity and ASPs - don’t lie; believe in them or die! The current capacity famine was instigated over two years ago, well before the crash, meaning today’s shortages were inevitable and accurately predictable, given the investment lead times. The next trash dynamic has not yet been triggered and, if overinvestment-driven, is unlikely to happen before 2011 at the earliest, meaning, 2012 impact, as reflected in our forecast. Each fundamental however always carries a health warning.

Economy: Economic disruption will always derail the chip market. The only questions are: “by how much and for how long?”

IC unit shipments: Managing this dynamic always takes judgement. The monthly run rates vary dramatically from the trend line making it impossible to balance medium term supply with demand (demand changes in days, supply changes takes months).

It is this mismatch that makes it ‘feel’ capacity expansion is out of control. That said, you always need to keep a paranoid eye on inventory and double ordering, especially in tight supply and demand cycles. Unfortunately reliable visibility into the demand chain is the weakest link in the whole chip market equation.

Fab capacity: Long-term wafer supply security is an industry prerequisite, yet increasingly trivialised and often overlooked. It is the fundamental fabless (Fablite) achilles heel, and the reason that FSA (now GSA) was formed in 1994. New capacity takes a year to come on stream meaning the next four quarter’s capacity is already cast in stone. Even if we splurged cap ex today, there will be no new sales impact until May 2011.

ASPs: ASPs are diagnostic and complex; systemic (Moore’s Law); structural (capacity/wafer Size); and sabotage (price wars). After a long period where all of these worked against industry pricing trends, we can now look forward to an extended period of structural ASP recovery potential.

As we mentioned in our previous reports, our 22 percent January 2010 forecast for 2010 was based on the relatively benign quarterly growth pattern of -1.0, +1.0, +6.2, +2.0 percent; in essence a very weak year. Q1 came in at +2.8 percent and no one we speak with is seeing lower than 3 percent positive growth for Q2. That alone would bring the year on year growth up to 28 percent.

It is now impossible for 2010 to be single digit growth; even low double-digit growth is incomprehensible to comprehend!

Why then are the trade associations and the industry leaders still talking down the industry? This is not caution, but complete irresponsibility. Barring an epic 9/11, Act Of God or immoral banker style disaster, growth of anything less than around 30 percent in 2010 is now all but impossible!