iSuppli Reaffirms 2006 Semiconductor Forecast

With no signs of a major drop-off in semiconductor demand this year, iSuppli Corp. is reaffirming its forecast for global chip sales in 2006, issuing only a slight reduction in the outlook.

iSuppli predicts global semiconductor sales will rise to $255.7 billion in 2006, up 7.8 percent from $237.2 billion in 2005. The previous forecast, issued in June, predicted global semiconductor sales would grow by 7.9 percent in 2006.

The figure below presents iSuppli's forecast for global semiconductor revenue and annual revenue growth.

Source: iSuppli Corp. October 2006

Computer and wireless markets maintain momentum
"The PC and mobile-phone markets, the major drivers of semiconductor sales during the past two years, have remained healthy in 2006," said Gary Grandbois, principal analyst with iSuppli.

The data-processing equipment segment, which is dominated by PCs, will experience global revenue growth of 7.3 percent in 2006, iSuppli predicts. Meanwhile, the wireless communications gear area, which is heavily influenced by mobile phones, is expected to achieve a revenue expansion of 5.2 percent for the year.

The PC market has shown some signs of slowing in 2006, prompting iSuppli to trim its growth forecast for the year compared to our previous prediction of a 9.3 percent increase. Although mobile-phone Average Selling Prices (ASPs) are falling rapidly, strong unit demand has prompted iSuppli to raise its 2006 wireless communications growth forecast from 4.6 percent previously.

"Regardless of these alterations to the forecast, both the PC and mobile-phone areas are maintaining their momentum in 2006, keeping semiconductor shipments at a higher level than they were during the second half of 2005," Grandbois noted. "Semiconductor revenue in the second half of 2006 is expected to be 6.4 percent higher than during the same period in 2005."

Energy prices fail to derail market
Higher energy prices in the third quarter began to impact the semiconductor market to a degree—briefly stunting growth in chip sales. This will result in a slower second half than usual for the semiconductor market, with chip sales rising by only 6.7 percent compared to the first half of 2006. This is the lowest rate of second-half growth since 2001, and is less than the long-term average of 8 percent sequential growth for the last six months of the year.

Some economists in the third quarter expressed concern that high energy prices would hurt consumer spending, possibly sending the U.S. economy into recession. However, the recent sudden drop in oil prices has mitigated this impact, and has brightened the outlook for the fourth quarter. iSuppli presently is not anticipating a recession in the U.S. economy.

Inventory concerns
Concerns have been raised that the recent increase in excess semiconductor inventory could bring a repeat of market conditions that occurred in 2004 when a dramatic rise in surplus chip stockpiles, customers sent back shipments and cancelled orders when second-half demand failed to materialize.

However, conditions in 2006 are markedly different from those in 2004. Two years ago, the excess builds and order changes/cancellations/push-backs were broad based across most segments of the electronics industry. In 2006, the bulk of inventory excess has been due to new product launches and market-share battles in the microprocessor and PC core logic chipset areas, with the majority of this surplus concentrated at one supplier: Intel Corp.

While some signs show an inventory glut has spread to other segments of the electronics industry, there are few indications that it is having a significant impact on chip sales.

Hidden changes in the semiconductor outlook
While iSuppli's overall semiconductor growth forecast has remained stable, there are a number of changes to the underlying factors driving the market, most notably in the memory area.

DRAM revenue growth is shaping up to be stronger than expected in 2006, with the per-megabit Average Selling Price (ASP) for the memory declining by only 16 percent this year, a significant slowdown from 40 percent in 2005. Because of this, worldwide DRAM revenue growth will accelerate to 24 percent in 2006, up from iSuppli's previous forecast of 8 percent.

The upgrade in the DRAM forecast is accompanied by a downgrade of the NAND flash memory outlook. A 60 percent decline in ASPs will blunt the impact of strong unit growth in NAND flash, resulting in revenue growth of only 17 percent for the year. iSuppli previously forecasted 37.2 percent revenue growth for NAND in 2006.

Other changes include a reduction in the microprocessor forecast and minor tweaks to outlooks for other applications.

Thus, with a combination of increased growth in DRAM, a decreased expansion for NAND flash, a reduction in the microprocessor forecast and only modest alterations in the other device outlooks, iSuppli's 2006 semiconductor forecast has seen little change in total.

Electronic equipment growth declines in 2006
iSuppli predicts that revenue from shipments of electronic equipment will rise by 5.1 percent in 2006, down from the previous forecast of 6.8 percent. This represents a significant decline from 8 percent growth in 2005.

This decline is largely due to the softening consumer-electronics market, which is expected to drop from 13 percent revenue growth in 2005 to less than a 3 percent increase in 2006. The slowing is mainly due to the fact that many of the hottest consumer electronics products now have settled into a stage of declining ASPs and slowing growth.

The impact of this slowing on the semiconductor market has been mitigated by the improvements in the DRAM market.

Beyond 2006
iSuppli also has slightly reduced its 2007 semiconductor forecast, but is maintaining its present outlook for 2007 to be the peak year of the present cycle.

Global semiconductor sales now are expected to rise by 10 percent in 2007, compared to iSuppli's previous forecast of 12.4 percent growth. iSuppli predicts global chip revenue will rise by 8.8 percent in 2008, before slowing to 2.6 percent growth in 2009. An annual decline in semiconductor revenue is not expected at least through 2010.