Feel-bad factor
Part of the slowdown is down simply to arithmetics; the second half is being measured against a much stronger prior period. And part is due to a midterm recovery inventory correction. Given the current semiconductor psychology, the industry finds itself in a crisis of confidence. No one - except us - seems to believe in the industry anymore.
Yet, from Future Horizons’ perspective, the industry fundamentals are as positive as ever. The global economy is strong, albeit slowing from 2004’s unsustainable levels, and the overall economic consensus is still for worldwide GDP growth in the 4% range for 2005, which is still way above the 3.4% long-term average.
Neither is wafer fab capacity out of control. New capacity is increasing at a very moderate pace, not least because the brakes were applied with a vengeance on new plant expansion mid year, and utilisation rates are still in the nineties. For sure they will fall a tad in Q4 and Q1 in line with the IC unit runrate adjustment, but this is an adjustment and rates will bounce back up again mid-2005. It’s hard to see where or how capacity will all go pearshaped.
Average IC selling prices (ASPs) are also steadily rising, up 8% this year versus 2003, but the problem here is they are still down 40% from their 2000 peak. That certainly feels bad, and has impacted profitability, but - given the strong economy, lots of new IC designs and tight fab capacity - there is a lot of upside potential for ASPs to rise in 2005.
That leaves just the IC units and there is an inventory issue here, but that’s because the 2004 growth rates were unsustainable, not because the markets have collapsed. Units are up 19% in 2004 versus 2003, which in turn were up 15% on 2002. The long-term growth trend is 13%. Whilst the 2003 growth was high due to post recession inventory replenishment, the 2004 growth was the result of over-ordering.
The first half of 2005 will be slow, both seasonally and whilst the inventory sorts itself out, bouncing back strongly in the second half, giving an overall growth of at least 15% in 2005 to $245 billion.
