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GSA Keynote: Analyst Has Good News, Bad News for Semiconductor Industry

Comments(0)Filed under: Industry Insights, EDAC, EDA Consortium, IC, semiconductor, GSA, foundry, EDA revenues, Ecosystem Summit, iSuppli, foundry forecast, Ultrabook, semiconductor revenues, Jelinek, semiconductor forecast, analyst, foundry revenues

Len Jelinek, director and chief analyst for semiconductor manufacturing at IHS iSuppli, would rather have given his Oct. 6 keynote speech at the Global Semiconductor Alliance (GSA) Semiconductor Ecosystem Summit six months earlier. At that time, he said, there were "great expectations" about how 2011 would be a second strong year for the semiconductor industry. But since then, he noted, "the bottom kind of fell out in our industry" and iSuppli is now expecting only 2.9% growth this year.

The good news? The semiconductor industry is still expected to have a compound annual growth rate from 2009 to 2015 of 10%, or 5.4% if you filter out 2009 and look at 2010 to 2015. The semiconductor industry, Jelinek said, is a "great place to work. There's a lot of challenge but it's filled with opportunity as well." And in spite of the bad economy, Jelinek said, most semiconductor companies "have done an excellent job of managing their business."

Economy Bites Hard

What has happened, quite simply, is that the global economic slowdown has hit the semiconductor industry hard. Jelinek noted that advanced economies are experiencing slow economic growth, high deficits, and mild inflation. Emerging economies are undergoing rapid growth and have manageable debt levels, but are experiencing higher inflation and are too dependent on exports to advanced economies. The result is reduced consumer demand and a "serious drag on our industry here and abroad."

Ten years ago, Jelinek noted, semiconductor revenues did not generally correlate with the global economy. "Our cycles were really caused by over-capacity, so we went through periods of reduced pricing and reduced demand," he said. "We drove our own destiny." In fact, during the dot-com boom, it could be said that the semiconductor industry drove the global economy. Today, Jelinek said, "the global economy has definitely driven our industry down."

In the past, the semiconductor industry has come up with a way to innovate itself out of tough economic times. What are the prospects for that? Jelinek noted that the first wave of consumer devices has already converted cell phones into much broader computing platforms. A second wave is now underway with tablets, which Jelinek thinks will move beyond personal use into the business world. Is there a killer app on the horizon? Jelinek believes the Ultrabook pioneered by Intel could potentially become one.

 Changing Forecasts

Although iSuppli is now looking for just 2.9% growth in semiconductors in 2011, it gets a little better in 2012 with 3.4%, and reaches 8% in 2014. "When you see this kind of forecast, companies are going to focus on two things - cash management and inventory control," he said.  "Times are going to be challenging for all of us." Even so, semiconductor companies are doing a good job of "managing through this crisis."

Pure-play foundries are facing lowered expectations as well. The iSuppli 2011 foundry forecast started at 18% growth, and is now down to 4.3%. In 2012 it's expected to return to 7.4%. Q3 2011 is expected to "go negative," but a "sustained recovery" is on tap for 2012, according to iSuppli.

One problem is that manufacturing overheated in the second half of 2010, and "we over-shipped the demand," as Jelinek put it. When the earthquake and tsunami hit Japan, companies continued to over-ship and inventory levels continued to rise. iSuppli expects inventory levels will begin to decline this quarter.

Here are Jelinek's short-term predictions:

  • The global economy will dictate what consumers do, especially as we approach the holiday season.
  • Manufacturing run rates will remain depressed through Q4 2011.
  • Semiconductor companies will focus on cash flow and inventory management.
  • Capital expenditures will continue to decline.
  • Further consolidation in semiconductor manufacturing is likely.

Here are some longer-term predictions:

  • Unsettled economic issues will continue to challenge how the industry moves forward.
  • Semiconductors will recover slowly in 2012, with total revenues around $324 billion.
  • Sustained grown will not return until 2H 2012.
  • Mergers, acquisitions and consolidations will continue to reshape our industry.
  • Capital expenditures will decline in 2012 and 2013 as companies absorb excess capacity.

Footnote: Jelinek did not discuss the EDA industry, but the very same week the EDA Consortium (EDAC) Market Statistics Service announced that Q2 2011 EDA industry revenue increased 17.6 percent year-over-year to $1.438 billion, compared to $1.222 billion in Q2 2010. All geographies, including Japan, recorded gains. It's an optimistic note, but Jelinek's presentation suggests that everyone in the semiconductor supply chain will have to work a little harder going forward and keep an eye on both challenges and opportunities.

Richard Goering



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