Analysis: Chipmakers given a glimmer of hope
The semiconductor business is going through a horrendous time, but market-watchers think the worst may soon be over.
Market analysts are forecasting a slow return to growth for chip sales from the middle of this year, believing the worst of the economic storm is already overhead. With investment in production capacity at an all-time low relative to sales, 2010 could see the return of shortages and price hikes. But only after one of the worst years ever for chipmakers.
Analysts such as Future Horizons and IC Insights are forecasting a double-digit slump in sales in 2009 compared with 2008, even with last year unexpectedly several percentage points down on 2007.
Malcolm Penn, president of Future Horizons, said the industry was derailed by the sudden onset of the recession. "It could have been such a good year last year. The industry was in fundamentally good shape. But everything went horribly wrong in September. The abruptness of the downturn has caught everyone by surprise. The speed of the collapse has been unprecedented: there was no slowdown, it simply stopped."
Bill McClean, president of IC Insights, said: "The semiconductor industry is very much wedded to the second half of the year, so this one really hurt."
Penn said the fourth quarter of 2008 was 23 per cent down on the third. "It has never been a double-digit drop before," he claimed. As a result, a year that was meant to see moderate growth actually registered a decline in the chip business.
The first quarter is equally bad. "We thought the industry would decline on the order of 20 per cent in the first quarter," said Penn, basing the estimate on forecasts by bellwethers such as Intel and foundry TSMC. He added that the market should have bottomed by the second quarter although there is still potential for a further fall.
In contrast to many previous slumps in the semiconductor business, which are often triggered by inventory build-ups, this one is accompanied by a fall-off in demand among the equipment builders. McClean claimed electronic systems sales are expected to be down 6 per cent this year. "This is only the third time: the other two times were in 2001 and 2002," he noted. "It is very rare that electronic system spending goes negative."
The problem for forecasting the state of the industry lies in determining how far systems sales during the boom were above long-term growth trends. Fuelled by easy credit, consumer electronics benefited, pushing the chip market along. McClean said: "Shipments grew 14 per cent during the period 2005 to 2007. Our position is that this trendline could not be sustained. But we weren't shipping above underlying demand. The underlying demand changed. What we are struggling with as a forecaster and an industry is: where will this line drop to?"
Many eyes are on TSMC and what it forecasts for shipments from its fabs in the second quarter. IIR Group said it expects the foundry to report its first net loss since 1990 for the first quarter after a collapse in utilisation, thought to have fallen as low as 50 per cent from 100 per cent just a few quarters ago. "We continue to believe that TSMC is positioned better in the foundry sector than any of its peers. We believe that the sector will reach its trough in 1Q09 before gradually moving to a recovery path over the year, as foundry customers begin to replenish inventory," said the firm in a statement.
If the storm passes by the end of the first quarter, Penn projects a flat second quarter followed by moderate rises in sales for the second half of the year. Because of the slump from the end of last year, Future Horizons expects little better than a fall of 28 per cent from 2008 sales. IC Insights is looking at a decline of up to 22 per cent, which could drop to 30 per cent if world gross domestic product for 2009 flattens relative to the current International Monetary Fund forecast of a rise of just 1 per cent. But, viewed on a quarterly basis, much of the worst could already have passed.
"From now until the end of the year, I think things will get much better," said McClean. "I believe the bottom is the first half of the year. I believe we will see a strong second half."
From there, shortages could emerge. "We are going to take capacity offline during 2009. That is a very rare event. We are going to shut fabs and not add any 300mm capacity," McClean claimed.
Some companies may not survive the storm to profit from rising prices driven by capacity shortages. Memory maker Qimonda has already gone into administration.
"The industry as a whole is in good shape," said Penn. "But some companies are in very poor shape."
McClean explained: "Why the downturn is hurting the semiconductor industry so hard is that we didn't have the boom before the bust. Last time, in 2000, that gave companies money to go into the recession. With this one we went in with a very mediocre market. Now companies are going into survival mode.
"In a way it is good because we didn't get the inventory build, but we don't have the cash reserves either," McClean added.