Forecast sees hard year, fewer chip makers

Rick Merritt SAN JOSE, Calif. – Under clouds of uncertainty about the global economy and mobile systems transitions, semiconductor sales will “muddle along” to growth of no more than five percent this year. But next year it will nudge toward…

Rick Merritt

SAN JOSE, Calif. – Under clouds of uncertainty about the global economy and mobile systems transitions, semiconductor sales will “muddle along” to growth of no more than five percent this year. But next year it will nudge toward double-digit growth, and long term a consolidating industry should be able to sustain modest expansions, according to the fall forecast from IC Insights.

“Our view is the [semiconductor] market this year is flat to up five percent,” said Bill McClean, president of IC Insights (Scottsdale, Ariz.) in an annual Silicon Valley talk here.

The company halved its 10 percent chip forecast earlier this year when the Japan earthquake hit and the U.S. economy turned soft. “If we get 3.8 percent global GDP growth this year, we’ll get a little better than average system sales of seven percent growth,” nudging up the chip forecast slightly, McClean said.

Despite the short term clouds, “the future is very bright for this industry–I see no long term change in the traditional average of 8-9 percent growth,” McClean said.

Projections for the U.S. economy slumped from four to 1.7 percent GDP growth earlier this year, driving down chip forecasts. The U.S. is expected to recover to 2.85 percent GDP growth in 2012, but it may only reach 2.2 percent if Congress fails to pass payroll tax breaks and extend unemployment benefits, he said.

The global GDP should return to a more typical growth rate of about 3.6 percent next year, buoyed by recoveries in Japan and the U.S. and continued strong growth in emerging countries such as China. China became the world’s largest buyer of PCs this year and was already the leading purchaser of cars (thanks to a government stimulus program) and cellphones, consuming 300 million handsets in 2010, McClean said.

Rising oil prices present the biggest risk to GDP growth. They soared 17 percent on a compound basis from 2002-2011 compared to just three percent from 1988-2002.

“I am surprised the world economy is doing as well as it is,” said McClean. “We don’t see global GDP hitting four percent over the next five years because we are caught on oil prices,” he added.

Re-election years can bring upside surprises. He speculated President Obama could by administrative action approve a broad four percent home re-financing program next year to give the economy a quick jolt forward.

Mobile shifts in systems sales

Electronic systems sales are expected to clock in at a typical six percent growth this year, nudging up to about seven percent next year. The telecom sector leads the growth at about 12 percent this year, followed by automotive at about six percent.

Mobile devices are also on the rise. Smartphones are growing not only in units but as a percentage of all cellphones (30 percent by the end of 2011), and the average selling price of a smartphone is at $118, up from $107 last year.

“If you are not in the smartphone business, you are out of the cellphone business at this point,” said McClean.

He noted a 14 percent decline in cellphone sales at Nokia which was late to enter smartphones. Meanwhile sales have almost doubled for Taiwan’s HTC that has focused on high-end smartphones.

IC Insights projects small steadily increases in PC sales for the next two quarters. Annual sales will rise from three percent growth this year to five percent in 2012 with most of the expansion coming from business buyers.

Uncertainty over how the rise of tablets will impact notebooks is especially high. Tablets are “so new people don’t know how they’re going to play out–this is really important for semiconductor industry,” McClean said.

People seem to be buying tablets instead of upgrading notebooks or buying netbooks this year, but it’s unclear whether that trend will continue. “You know Intel is going crazy because if people buy tablets instead of a PC, that’s a disaster for them,” he said.

Tablets use a quarter of the DRAM memory in a laptop, but they build in more NAND flash. However, if tablets sell in the high volumes IC Insights projects (55 million this year, rising to 176 million in 2015) the total amount of chips used in mobile systems will lift all boats.

DRAMs drag down chip prices

The market watcher projects IC sales at $270.5 billion this year, up four percent with average selling prices down three percent. It forecasts sales to rise ten percent next year to $298.7 billion with ASPs up one percent.

“DRAM is driving down ASPs this year–take DRAMs out and ASPs would be flat,” said McClean.

He predicted Elpida, Nanya, ProMOS and Powerchip won’t be able to keep pace with other DRAM makers to get the estimated $5 billion needed to build a next-generation fab.

The good news is vendors don’t have much excess inventory on hand. Tablet makers Research in Motion and Acer are exceptions to the rule, sitting on unfulfilled sales expectations that range from about one to five million tablets.

Fewer, bigger chip makers ahead

Worldwide semiconductor capital equipment sales continue to fluctuate widely from a low of $25.7 billion in 2009 to more than doubt that–$58.9 billion–this year. IC Insights predicts it will dip about eight percent next year before starting a more moderate three-year rise to about $72.9 billion in 2015.

The 2015 figure marks an extra boost, folding in expectations that spending on 450mm wafer fabs will begin in earnest that year. “Intel and TSMC are talking about it,” McClean said.

In the short term, “we are seeing some build up of excess capacity in foundry and demand is softening, so we expect to see some utilization decline” at foundries, he said.

That’s not surprising given foundries are spending an estimated $18.6 billion on gear this year, up from $13.8 billion last year.

Globalfoundries in particular “lit a fire under TSMC by spending more than 100 percent of sales on capex,” said McClean. Next year they will probably be one of the biggest capex cutters–they are sending way too much,” he said.

Long term, foundry capex spending needs to average about nine percent growth a year to track chip unit volume rises and keep prices stable, he said.

For its part, Intel is expected to double capex this year. “They think this is going to get them ahead of ARM and into mobile systems, so they are stepping on the gas,” McClean said.

Samsung will cut DRAM capex but continue spending on flash. The company spent almost $20 billion on gear in the past two years. “That’s four big $5 billion fabs,” he said.

Sony is increasing capex spending in a focused two-year program to take a lead in image sensors. Otherwise it is maintaining plans to go to a fab-light model, he added. Overall, Japan is spending a lot less in fab gear, while the U.S. in the form of Intel is spending more.

The mega-trend in chips is consolidation. “As we move to the 450mm wafer generation, the IC market will be in the hands of ten companies worldwide, and they will not sell cheap so pricing will stabilize in the long term,” McClean said.

That dynamic will put a damper on economic development plans in India to get into the chip business. “The starting point is $5 billion, so the door is closed and there are no openings,” McClean said.