Nov. 09 update: -10 percent growth in 2009, +22 percent minimum for 2010, says Future Horizons

Here are the excerpts from the Global Semiconductor Monthly Report, November 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 may contact Future Horizons.

As a result of September’s sales exceeding the high end of even our best-case expectations, Q3-09 romped in with a massive 19.7 percent quarterly growth forcing us to once again revise upwards our 2009 forecast.

We now have 2009 pegged at only a 10 percent decline, a long way off from the minus 28 percent number we were staring in the face this time last year. Plugging this new base line into our 2010 forecast increases the growth outlook to at least 22 percent. If Q4 continues the Q2/Q3 momentum, this could even go much higher still. This is not wishful thinking … the market recovery has now broken through its escape velocity. Only a global economic disaster of cataclysmic proportions can now derail the chip recovery dynamics.

Ignoring the structurally (and typically) wild individual monthly fluctuations – which simply means no single month’s data is a good indicator of the underlying trends – September’s result means our recently revised minus 14 percent growth estimate for 2009 is far too pessimistic. We are now officially increasing this to minus 10 percent.

Partly this reflects the fact the Q4-08/Q1-09 market decline was far too steep and partly it is the result of the maths whereby all future monthly 12:12 growth numbers will be measured against a dynamic whereby the 2009 numbers are trending up whereas the 2008 numbers are trending down, amplifying the impact of the 2009 positive monthly trends.

The big question to our mind is: “Why is it that everyone seems absolutely convinced that 22 percent growth for 2010 is simply not possible, expecting instead something in the 10 to 16 percent range?” The reasoning is usually accompanied by comments along the lines “chips are becoming cheaper” and “there are no killer applications to drive (sustain) the recovery”, meaning such a strong growth forecast is a “reflection of wishful thinking and not market reality”.

We disagree! First from a forecast perspective, the difference between 16 and 22 percent growth is not so statistically significant, so what we are really looking at is two distinct forecast scenarios … 10 to 14 percent (which includes the WSTS and most of the independent forecasting firms) and 16 percent plus, which at the moment comprises primarily ourselves.

Mathematically, a 10 to 14 percent growth means a collapse in the market in Q4-09 (i.e., right now) – with only low single-digit sequential quarterly growth – continuing on into the first half of 2010.

The 10 to 14 percent growth scenario thus mean a sizeable first half-year slowdown followed by only a modest second-half recovery, which in truth is what people feel mindful to believe but is not what the facts and the analysis supports. No one we have spoken to or researched is (a) experiencing and/or (b) forecasting such a fourth quarter slow down, in fact most Q4-09 industry guidance is in the 5 to 7 percent growth range. Quarterly forecasts and/or guidance for 2010 are simply not available … no chip CEO is willing to publically nail these to the masthead, but we can look to the foundries to sneak some good insights.

In contrast, our Q4 forecast is for +6.4 percent growth, right in the middle of the published industry guidance. It is this strength that has forced us to revise our 2009 forecast up to minus 10 percent and, at the same time, set the platform for 2010’s 22 percent growth, supported by a not unreasonable quarterly scenario. There is thus a current massive disconnect between perception and reality. More Future Horizons’ blue sky wishful thinking? Absolutely not!!

The first quarter in any year is typically seasonally slow, so sales growth will theoretically slow from Q4’s 5 to 7 percent range. It often goes negative. As there is currently no Q1-10 chip company guidance (does anyone think beyond the current quarter these days?), a look at what is happening in the foundries gives some insight, given Q4-09’s foundry sales are Q1-10’s IC sales … the three-month wafer fab and IC production cycle time.

The fact is Q4 foundry sales are holding up strongly, implying a more modest than normal seasonal first quarter decline. For example, TSMC is expecting Q4-09 to be up between 3.3 to 5.5 percent, which would indicate a flat to small positive Q1-10 growth for the industry as a whole. This is in stark contrast to their original Q4 guidance (published in the third quarter) that called for a 4.8 percent Q4 decline.

Other foundries are similar and, equally importantly, no chip firm is yet issuing warnings about the market falling of a cliff and/or hitting a brick wall, and there are no other indication of a first quarter collapse, for example order cancellations, reschedules and evaporating backlogs, all of which gives us (but not yet the industry) strong anecdotal confidence that the chip market is not crashing.

For the record, our 22 percent 2010 growth forecast called for a 2 percent Q1 quarterly decline, which was intended to be a somewhat of a middle of the road position. It was certainly not chosen to be aggressive or optimistic. Paradoxically, it now seems an increasingly unduly pessimistic position, flying in the face of the foundries Q4 performance.

Q2 is then typically a flat to small growth quarter; for our forecast we plumped for a relatively safe 0 percent number. Q3 is then seasonally strong (we went for a middle of the road +10.3 percent) followed by a Q4 seasonal slowdown (in our case +2 percent growth).

None of our 2010 quarterly growth numbers are thus optimistic or aggressive from a historical growth standpoint, if any thing they may transpire to be somewhat conservative. Yet it is this ‘benign’ quarterly growth pattern that leads to our 22 percent number.

It is hard to get this down to a 16 percent growth level; the quarterly pattern needs to be -4, -2, +8 and +1 percent, meaning 2009’s recovery would have already run out of steam. No one is reporting this, certainly not the foundries. You would need an even more serious collapse to get this down to the 10 to 14 percent levels.

So, not only is 22 percent growth in 2010 highly achievable, it is well on the cards we will be forced to revise it UP at our January IFS2010 annual industry forecast seminar … despite what the general industry consensus currently thinks!

There is thus a total disconnect between what people think the trends and numbers are and what they actually are. Partly this is a classic “yes but let’s wait and see what the next quarter actually brings before we really start to believe in the recovery”, typical of any early chip market recovery, and partly it is a total lack of confidence in the industry per se.

People are also guilty of not properly thinking through what the numbers are saying and then when they do, not believing in the answer, instead seeing only the technical difficulties (they have always been massive) not the market opportunities, and ignoring the fact that killer applications are a 20:20 hindsight phenomenon.

Interestingly, we have not even factored into the forecast any potential price increases (due to allocations or shortages) as we believe, due to fiscal drag, these will not significantly impact ASPs until 2011. What we do believe however is that chips cannot forever keep on getting cheaper and that the industry is on the cusp of a structural ASP rise.

ASPs are a very complex issue, driven not just by price increases but also product mix, IC innovation, capacity and production techniques. For sure the industry has seen declining ASPs since the 2001 crash but it is fundamentally flawed logic to extrapolate this into the future; a little like saying real-estate prices will forever keep on rising. They do not; neither will IC ASPs keep on falling.

First, in the same time period we experienced a major yield bust at 130nm, delaying its introduction by a year and destroying the ASP price enhancement it would otherwise have had. Second we had the transition to 300mm wafers, the sole purpose of which was to cost reduce ICs. A 2x plus increase in dpw for only a 40 percent wafer cost increase means a 40 percent die cost decrease. As is typical in our industry, all of this cost reduction was immediately passed on to the customer meaning all 300mm wafer sourced ICs were reduced in selling price by up to 40 percent.

Third, for DRAMs, where fabs must always be kept fully loaded, the increase in die output was more than the market could stand meaning rampant oversupply and the mother of all price wars. It is only now that this massive one-off incremental capacity increase has been absorbed that pricing can return to its ‘normal’ pricing curve.

A fourth factor then was the brutal Intel-AMD 32-bit MPU price war that saw ASPs fall around 30 percent from their more normal US$100 level to US$70. With AMD now bloodied, bruised and losing money, we can expect to see MPU prices now recover.

Finally, excess capacity also played its role but is already no longer a factor due to the significant slow down in new capacity investment over the past two years or so. Wafer fab investment is now historically down 75 percent versus historical norms. With a one-year time delay between investment decision and net new capacity, it will be 2011 at the earliest for this trend can be reversed (2010’s Cap Ex spend) but even the forecast ‘50 to 60 percent’ spend growth versus 2009 is still pitifully small in absolute terms – it is simply too little too late.

Industry thus entered Q3-09 (Q4’s IC sales) at near full capacity and little inventory in the food chain, it all having been depleted in the first half of the year, with no chance yet to rebuild any stocks. 2H-09 orders are being shipped pretty much hand to mouth and lead times are extending. Q4-09’s utilisation rates (Q1’s IC sales) are holding up quite strongly, allowing some inventory replenishment given the seasonal IC sales slowdown.

In this way, the industry will muddle through the first half of 2010, lulling itself into a false sense of security, worried on the one hand that unit demand will not hold up and deluded by the ‘belief’ there is ‘more than sufficient capacity’ to meet industry demand. There is not.

Unless the economy tanks, unit demand will continue to grow which means there is nowhere near enough long-term capacity. Industry will collectively wake up in mid-2010 to a seasonal demand increase with all of the first half-year ‘excess capacity’ used up, no significant inventory and allocations endemic. This will be the real trigger for IC price increases; these will not impact the ASP until 2011.

Just as a combination of factors collided to depress IC ASPs over the past several years; none are sustainable and all are now reversing. The era of ever decreasing chip prices is over. 2010’s upward ASP trend will be determined more by the year-on-year maths; the real impact will not happen until 2H-10 once industry wakes up to the fact 2010 really will be a 22 percent plus growth year.

Unfortunately, the parallel industry drift to ‘fab-lite’ – the easy tech syndrome illusion – means that it will not be the IDMs who benefit from the forthcoming up-turn, the clear outright winners will be the independent foundries, in particular TSMC who continued to increased their capacity whilst the other semiconductor companies did not.

Intel and Samsung aside, TSMC is the only (non-fabless) chip firm that really understands this business … all the other IDMs and fab-lite proponents are looking for band aids and instant quick fixes. The fact is, as this next up-turn will show, capacity equals sales; no capacity equals no sales. It really is that simple and it is a perfect correlation.

No capacity also equals IC (wafer) price increases (supply and demand). It is one thing to have to pay a higher price for your wafers – that can be passed on; it is another matter entirely not to get the wafers at all … that will be the kiss of death for many fabless (fab-lite?) firms.

2010 will thus herald the long overdue unmasking of the Emperor’s new clothes ‘fab-lite’ business strategy. Fab-lite, like cheap debt, is just another beancounter/Wall Street scam … seemingly a balance sheet lifesaver, in practice too good to be true. Unfortunately Wall Street does not care, they will simply move on to their next slight of hand. The real losers are the employees, customers and institutional investors. What I call ‘Fab Smart’ is the only IDM option.