18pc Q2 vs Q1 sequential growth… this improves 2009 To -14pc: Semicon update Jul. ’09

Here are the excerpts from the Global Semiconductor Monthly Report, July 2009, provided by Malcolm Penn, chairman, founder and CEO of Future Horizons. There are a lot of charts associated with this report. Those interested to know more about this report should contact Future Horizons.

Fig. E1 shows the 12/12 worldwide monthly growth rates for IC sales in dollars, units and ASP for January 1997 to May 2009 inclusive. They need to be looked at in conjunction with the other 12/12 and rolling 12-month charts provided in the Market Summary section of this report.

Following hot on the heels of April’s 16 percent month-on-month sales growth, May grew a further 0.9 percent sequentially (0.4 percent for ICs), putting June on track to break through the US$20 billion barrier, for the first time since the chip market collapsed last September. It would also set up Q2-09 to show 18 percent quarter on quarter growth, joining only three such precedents in the history of the industry when such a strong second-quarter growth spurt has occurred.

The big question now is: “Is this the start of the chip market recovery or a blip on the statistics radar screen?” The short answer is both, the industry’s not out of the woods yet, but the chip market will recover faster than the economy. The stage is now set for a strong market rebound in 2010-11.

We are clearly in the midst of a serious industry recession but different from all previous historical precedents. As we have counselled before, going into this recession (the 12th in the industry’s 60-year history) the industry was in structurally good shape; that is something that has rarely happened before.

In addition, while the economy clearly drives the overall market for semiconductor devices, the correlation is poor meaning chips march to their own drum not just the economic pulse. Both of these factors mean that the chip market can (and will) recover much faster than the economy as a whole.

With the benefit of hindsight, the whole world clearly over-reacted to the 14 September 2008 Lehman Bros collapse, something again with hindsight the US officials probably now regret letting happen, and the massive destocking that followed masked the underlying residual demand. For sure markets too were down but they only declined not evaporated completely. The impact on IC unit demand was a victim of this uncertainty.

Between Q4-08 and Q1-09, peak to trough unit demand fell by almost a half whereas even the worst hit markets (e.g. automotive) demand only fell 40 percent over the same time period. PCs and mobiles fell by only half that amount. We have always said a strong rebound was inevitable but this trough lasted just one month, the bounce back was immediate. It was this rebound timing that has caused us to change our forecast, hitting one quarter earlier than we had predicted in our January 2009 forecast seminar.

This inventory correction period will be over relatively soon, in fact it probably already is, but the timing is now positive in that its end will coincide with the start of the seasonally strong third quarter boom. This will help soften the inevitable slowdown in sales as chip orders now move from ‘sales = demand + inventory build’ to ‘sales = demand’ and help maintain unit demand through the end of this year, following the traditional quarterly pattern of a slow Q4-09/Q1-10 and a normal seasonal pattern thereafter driven by the overall economic recovery.

In the meanwhile, the industry’s capacity for innovation, which is always stimulated by economic recession, means it will continue to recover faster than the general economy, with the capacity (and ASP) impact of a barren Cap Ex landscape yet to kick in. Collectively the industry has not spent so little on Cap Ex since the early 1990s, when the chip market was a third the size it is today.

Fab capacity was already starting to get tight before the recession hit; had the recession not happened 2009 would have seen a return to allocation. With Cap Ex estimated to be cut back a further 50 percent this year, the industry is on course for massive capacity shortage.

If the current global economic forecasts for 2009-10 are correct, there is no way the industry can respond to demand.

Unlike the unit demand scenario, the capacity situation is likely to get worse over the next few quarters. With current Cap Ex spending at the ‘spares and maintenance’ only level, it will be mid to late September before anyone looks at this again seriously. The earliest for meaningful new orders will thus be Q4-09 by which time we should have had an '8-12 percent'' Q3 semiconductor sales growth quarter under our belts, good, but not good enough to set off the fireworks.

Q4-09 will then come in seasonally slow, adding more caution to an already overcautious foundry market, followed by a seasonally slow Q1-10 before Q2-10 kicks in to build Q3's seasonal spurt. By that time all of the spare capacity will have gone and suddenly everyone will wake up to the fact that the cupboard is bare.

This will present big challenge to the capital equipment people. Some day in the future they will suddenly get a phone-call saying, “Instead of cutting our Cap Ex by another 50 percent this quarter, we are increasing our orders by 300 percent and we want delivery immediately”.

Even if Cap Ex were doubled next year, it would only bring spending back to 2008’s derisorily low level. Yet the best growth the industry has ever managed to record was 87 percent in 2000, from US$25.5 billion to US$47.7 billion … from a position of business strength. This time around they will be asked to grow twice as fast … from a position of structural weakness. Granted the chip business is good a pulling rabbits out of hats but this is going to be one rabbit too many. It simply will not happen and capacity shortages will result.

Ironically, it is the foundries that will benefit the most from this shortage and the IDMs squeezed hardest, caught out by their lack of in-house capability and competing heavily with the top tier fabless firms, many of whom are their strongest competitors, for foundry share of mind.

This in turn leads naturally to ASPs. ASPs are a enigmatic phenomena, the most complex and least understood aspect of our business, simply because they work under the influence of so many different factors, everything from die shrinks (more chips per wafer) to the next generation devices (fewer chips per wafer) and market conditions, both investment-related and quarterly-related.

For example, ASPs always trend down in the first half of the year and up in the second half. Then there are the human factors, from price wars to buying into new markets and filling the fabs up, whatever the price. In other words ASPs are influenced by lots of simultaneous stimuli all pulling in different directions; a thick-pea soup of collision dynamic chaos.

Bottom line … the industry has been stuck in an ASP trap for the past two to three years, doing more for less, this is clearly (to us) economically unsustainable. ASPs will now trend upwards, driven by innovation and capacity shortages. That will see the industry enjoy double digit growth rates in the 2010-12 period.

Many market trends are not based on rational decisions, but emotional ones, and therefore are difficult to predict. The current market boom is both the start of the cyclical industry recovery and a statistical blip caused by a counter-reaction to the earlier industry over-reaction.

The 2009 market will still be down 14 percent on 2008 but the unknown unknowns are now abating and people are starting to feel they can focus on building their businesses rather than concentrating on survival. 2010 should see growth in the 19 percent region with 2011 in the mid- to high-20s driven by the inevitable sever capacity shortages that will start to bite home next year.