This downturn was NOT a classic semiconductor bust and boom, ignore industry fundamentals at your peril: Future Horizons

According to Malcolm Penn, chairman and CEO, Future Horizons, May’s semiconductor sales were up 2.6 percent on April, 3.6 percent for ICs, continuing the steady sequential industry growth that started in January 2009, 17 months ago.

May’s results mean Q2-10 will show at least 8.3 percent quarterly growth over Q1-10, increasing the full year growth forecast to 36 percent. Given last year’s growth was minus 9 percent, mathematically this is a classic industry cycle. It is NOT, he insists!

At this point in the ‘recovery’, it is much more important to look at sequential and quarterly growth rates rather that the 12:12 rates, given the high double digit rates they show are just as misleading and irrelevant as the high double digit negative rates from this time last year. The reality is that they net each other out, thereby highlighting the real nature of the current cycle. This downturn was a pause, the recovery a restart, it was NOT a classic semiconductor bust and boom.

Future Horizons has been telling everyone very publicly that the industry recovery started in March 2009, first in the April 2009 edition of its Global Semiconductor Report, substantiated by a very long and detailed analysis at the Geneva IEF2009 Forum last October.

The recovery, together with ever-increasing substantiating data, has been a recurring theme in our Global Semiconductor Monthly Report ever since, as well as at the Dresden IEF2010 event in May 2010.

Penn added: "At the same time I have been warning that industry was cutting back existing capacity far too much and too fast whilst simultaneously failing to invest in net new capacity. Our clear message always was that these two factors were a recipe for disaster. The disasters are now starting to happen.

"While we obviously do not expect firms to run their business based on what we say, if the market recovery really has taken firms by surprise, executives from the top down either failed to recognise the significance of the data we were drawing their attention to over the past 15 months or they simply made the decision to ignore it. Ignore the industry fundamentals at your peril."

Recovery not quite classic!
Future Horizons clearly states that this recovery is not a classic recovery. On being quizzed further, Penn said, "it was a dead stop and restart, just like hitting the pause button on your remote, rather than a crash and rebuild." This is perhaps the same reason why the recession is now being termed as a market interruption.

Future Horizons has also been warning that industry was cutting back on the existing capacity far too much and too fast, while simultaneously failing to invest in net new capacity. Is the semicon industry still on this path? Penn added: "Spending has now resumed (since Jan. 2010) and cut backs have stopped, but there's a one-year time delay before these will start to impact. Why? Lack of industry confidence, driven too much by short-term financial performance, risk averse management and shareholders, lemming factor, etc."

The long-term ramifications, should the industry fail to invest in net new capacity, are loss of sales and market position/leadership to those firms who did invest (e.g. TSMC, Samsung).

Well, it seems the global semiconductor industry has not learned enough from the previous recessions!

There is also a Q2-Q3-2010 fab famine to work through. Elaborating, Penn said that it takes about nine to 12 months from deciding to add new capacity to actually getting the new capacity on line.

Future Horizons also foresaw component shortage. Now, there are reports of complaints regarding IC component shortages. At this stage, Penn advised the industry players to manage their businesses properly, which requires judgement, as opposed to simply reacting to problems. "Right now, the tail is wagging the dog," he added.

Expect 14 percent growth in 2011!
Finally, what is the overall forecast for the global semicon industry in 2010 and what's the forecast looking like for 2011? Penn said: "It is 14 percent (down from 28 percent), purely because 2010 is now 36 percent (up from 22 percent), the combined result is the same."

The reasons are explained more fully in the Executive Summary of the Future Horizons' report.