Dale Ford, senior vice president for iSuppli is quoted as follows:
"The semiconductor industry's growth cycle is shaped by six primary, interrelated forces—global economic health, electronic equipment production, chip supply/demand balance, capital investment, industry and individual company profitability and competition... All six of these areas will present challenges for the semiconductor industry in 2009."Let's take a look at a few of these.
Global Economic Health --
The recession that began in the U.S. has become a global phenomena. This is impacting both consumer electronics and enterprise equipment suppliers. With declines in OEM factory revenues projected, semiconductors will feel the knock-on effect. iSuppli expects the result for semiconductors will be excess inventory, declining sales and downward pressure on prices. Indeed, they fear inventories at the end of Q4 2008 will expand by 268% over the Q3 level.
OEMs will continue to struggle to eliminate costs and conserve cash. Consumers are expected to exhibit the same behavior as the OEMs in terms of tightening up their finances. Both developments will cause the semiconductor manufacturers to see a decline in sales in 2009.
In terms of sectors, the situation in 2009 will range from bad to lack luster. iSuppli expects mobile PCs and LCD TVs to show low single-digit growth while other segments such as handsets and automotive electronics could suffer notable declines. Optoelectronics may show minor growth based on usuage of LEDs. Microprocessors and DRAM may do better than other sectors due to marginal growth in PCs though iSuppli is projecting a decline of 4% in 2009 compared to 2008.
iSuppli now expects unit shipments of 1G and 2G mobile handsets to drop more substantially in 2009 than previously thought. Shipments will fall by approximately 14% compared to an earlier forecast of a 1% decline. Desktop PC shipments are expected to decline by about 5% in 2009 compared to 2% growth expected before. Mobile PCs remain somewhat of a bright spot although the forecast increase of 15% has been pulled back from prior expectations of a 25% jump. Preliminary iSuppli forecasts show unit shipments of rigid disk drives in 2009 falling by about 11 million units compared to 2008. These declines in shipments will have the effect of depressing production of application specific standard products (ASSPs), application specific ICs (ASICs) and programmable logic devices (PLDs). Companies like Skyworks and RF Micro Devices fall into the first category, Altera and Xilinx fall into the last two categories.
Inventory Issues --
Returning to the inventory issue, many industries have reset their inventory target levels in anticipation of a long economic downturn. Any inventory that is now considered "excess" will have to be used before the semiconductor companies see any new orders. This is aggravated by the fact that business deteriorated much quicker than expected at the end of Q3, leaving Q4 production schedules set too high. This is compounded by the fact that many OEMs were unable to cut production as fast as they would have liked. The outcome is a big overhang of excess semiconductors further up the supply chain as we move into 2009.
iSuppli samples 180 electronics companies, representing more than 80% of the revenues of the industry. They now estimate that there will be $10.4 billion of excess semiconductor inventory at the end of Q4 2008. Much of this will need to be consumed before the semiconductor industry overall sees a resurgence in new orders. Putting the $10.4 billion into perspective, at the beginning of the dot.com bust, iSuppli measured US$13.4 billion in excess inventory, which took two years to work down to manageable levels.
Adding their two cents, Gartner chimes in with their own prediction. They are forecasting that semiconductor revenues will total US$219.2 billion, a 16.3% decline from 2008. They are a little more optimistic than iSuppli on Q1 2009. Having seen such a steep decline in inventories in Q4 of 2008, they think sales might turn out to be a bit better than seasonally expected as some inventories need to be replenished.
Industry managers downbeat --
We've heard what the analysts think, how about the people who run the semiconductor companies? Well, they're not too cheerful either.
A global survey of semiconductor company executives was conducted by KPMG LLP, the U.S. consulting firm. Semiconductor executives anticipate a steep decline in profitability over the next 12 to 18 months. They see R&D and capital expenditure investment decreasing significantly next year, and see significant workforce contraction, according to the survey.
"Executives are clearly telling us that the negative industry trends we began to see in September are expected to deteriorate further, and these companies will need to become more efficient in managing costs — especially with tight credit markets," said Gary Matuszak, leader of KPMG's global Information, Communications, and Entertainment practice.
Fifty-two percent of those surveyed in November said they expect revenue to decline, including 39 percent who see a decline of greater than six percent. Respondents also said they expect the negative profitability trend to extend beyond the short-term. Forty-seven percent of overall respondents said they see global semiconductor profitability as volatile, unpredictable or declining over the next three years
Semiconductor equipment companies impacted --
If managers are expecting R&D to decline and sales to trend lower, it is a certainty that semiconductor equipment companies are in for a bad time, as well. Companies like Lam Research, KLA-Tencor and Applied Materials are already suffering. Applied Materials has been relying on the solar sector for growth in 2008 but solar doesn't look too exciting as we move into 2009.
With semiconductor funds like the SPDR S&P Semiconductor ETF (XSD) moving up strongly from their November lows it seems investors were willing to bet the worst had been seen. After hearing from the analysts and managers quoted above it is not surprising to see XSD has given up much of its gains.
On the positive side, both Gartner and iSuppli are confident that semiconductor sales will bounce back in 2010 with Gartner expecting double-digit gains over 2009. iSuppli is more circumspect. They are projecting the industry will grow by 6.4% in 2010 and that this will be followed by growth of 10.8% in 2011, the first year to show a double-digit gain since 2004.
So, as a tech investor, there is no particular hurry to commit to semiconductors in the near term. The industry has work to do just to get through 2009. Long-term however, the industry still has potential and from a stock price perspective, it may be better to get in too early rather than too late.