Chip market IC unit volume shipment trend, graph

Analysis: Chip market bounces back

The semiconductor industry is recovering from recession much faster than world economies in general, says E&T.

No sooner had it started, than the recession was over for chipmakers. Much like everything else, orders for integrated circuits (ICs) slumped in 2008. But by the middle of last year, recovery was well underway.

IC suppliers saw, on average, a decline in sales compared with 2008 of around 10 per cent. But Silicon Laboratories grew its revenues in 2009, with the last quarter of the year coming in 28 per cent up on the same quarter of 2008.

Broadcom left 2009 just 4 per cent down on 2008. Discussing the company's results, Broadcom CEO Scott MacGregor said: 'Quarterly revenue reached a record level and is up 57 per cent from a tough quarter in Q1 2009. The first quarter of 2009 saw a fall of 20 per cent from the same period in 2008.

Linear Technology, which has a broader target market than the communications and consumer-focused Broadcom, ended its last quarter 'with the strongest positive book-to-build ratio we have had in many quarters', according to CFO Paul Coghlan. 'This was an excellent quarter for us. Sales increased 9 per cent sequentially from the previous quarter, growing in each major area: US, Europe, Japan and the rest of Asia.'

Malcolm Penn, chairman and CEO of analyst firm Future Horizons, describes the situation for the last quarter of 2009 as 'one of the strongest year-end closes on record. Q4 sequential growth is typically 'zero plus or minus 2 per cent''. Overall, according to Penn, fourth-quarter sales were 6.4 per cent higher than in the third quarter.

In previous cycles, economic booms have been accompanied by inventory build-ups and even panic buying, pushing up prices in the process. When the market collapses, the chipmakers suffer as their customers take months to work off the inventory or, worse, sell it on the grey market at knock-down prices.

This time, it was different. 'There was no inventory adjustment,' says Bill McClean, president of analyst firm IC Insights. 'There was an adjustment to lower demand but it was not a reaction to inventory.

'We weren't shipping above underlying demand. Underlying demand fell away from under us. But, in just two quarters we are back to the long-term trend line for unit demand, or damn near it. The first two quarters were the worst quarterly declines we have seen. And the second two were the best. In one 12-month period we had the worst two quarters and then the two best.'

At the same time, demand for some end-user products powered through the slump. 'We just went through the worst global recession in 63 years,' says McClean. 'And the PC market was up. Even cellphones were down only a few percentage points.'

The effect of stimulus packages was clear. Coghlan said demand has been stronger than expected, 'aided by government stimulus programmes'.

Coghlan noted that demand for automotive semiconductors tailed off towards the end of year. As a share of Linear's business, 'automotive decreased to 11 per cent from last quarter's all-time high of 13 per cent as most government stimulus programmes, or 'cash for clunkers', have ended.'

The stimulus money, in many cases, was steered towards technology products, which helped demand for products such as set-top boxes. And, although some short-term consumer-focused programmes have ended, there is still money in the pot. 'Most of the stimulus has yet to be spent,' says McClean, pointing to one example in the $4.7bn US broadband initiative programme. 'Just a month ago, the first contract went out for about $200m. There is still $4.5bn left,' he adds.

The stimulus and recovery-powered surge in unit demand comes at a time of tightening fab capacity. Penn points out that fab capacity measured at the end of the third quarter of 2009 reduced 12.5 per cent compared with the previous year. The result is that, although Gartner is more conservative with a projected growth of 13 per cent, analysts such as McClean and Penn see 20 per cent-plus growth for the chip market in 2010. If shortages force up prices, it could hit 30 per cent or more.

'I think the second half of 2010 could surprise on the upside. We think pricing is the wild card,' says McClean.

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