Can the semiconductor market regain its momentum in 2008?

With the current cycle delivering such weak growth and with economic worries mounting, concerns are rising over whether the semiconductor industry can regain its momentum and manage to expand this year. iSuppli Corp.’s current forecast calls for the global semiconductor industry to achieve revenue growth of 7.5 percent in 2008, up from 4.1 percent in 2007. But amid signs of weakening pricing and reduced demand for NAND flash, as evidenced by Apple Inc.’s recent slashing of its expected 2008 order levels for the memory and Intel Corp.’s financial warning, iSuppli expects to modestly trim its 2008 semiconductor growth forecast later this month. With the current growth cycle having hit bottom in February 2006, the semiconductor market normally would be expected to undergo a robust rebound in early 2008, following the industry’s normal cyclical pattern. However, the current cycle is generating so little growth that a strong market expansion is not expected this year. Despite this, factors including tighter inventory controls and a limited economic downturn are expected to keep semiconductor growth positive for the year, noted Dale Ford, senior vice president, market intelligence at iSuppli, speaking at the company’s North American Briefing event here last week.

Ford noted that semiconductor cycles tend to lose momentum due to supply/demand balance factors within the electronics value chain, rather than because of overall end demand issues. An imbalance in supply/demand is most easily seen through an analysis of excess inventory levels.

“In the early stage of the expansion, we see the sales momentum return, we see the growth come back and we see companies eager to capture market share,” Ford said. “Thus, we have over production and over capacity. Then, later on, the market must bring things back into balance, which leads to a correction.”

However, Ford noted that the inventory situation shows that the industry is currently in a reasonably healthy balance at this point in the semiconductor growth cycle.

“The last major downturn (in 2001) had a perfect storm of over build of capacity, a collapse in demand and out of control inventory levels,” Ford said. “The industry has gone through a learning period on how to manage capacity more tightly. We’re now getting an earlier warning signal for excess inventories. Once there was a signal that inventories were out of balance, the industry responded quickly to get them back into balance. Once the inventories stabilize, we will see a return to balance between production and demand.” Ford noted that excess semiconductor inventories in the electronics value chain are expected to fall to the $3.3 billion range in the first quarter. This will be down dramatically from its peak of $6.1 billion in the first quarter of 2006.

Meanwhile, semiconductor makers plan to manage overall factory utilisation in 2008 at levels comparable to 2007, helping to restrain supply growth and to keep pricing from falling too much for many semiconductor part types.

Furthermore, Ford said that most economists predict the U.S. economy will show either low growth or experience a mild recession in 2008 but will avoid a major recession this year. With global electronics manufacturing growth projected to drop modestly in 2008 compared to 2007, this will limit the negative economic impact on the semiconductor industry.

The lack of a major increase in semiconductor revenue growth momentum reflects a long term trend in the chip industry toward more restrained expansion.
“It’s interesting to go back 20 years and see the shifts in long term growth rates,” Ford said. “Years ago, the global semiconductor market maintained a 27 percent Compound Annual Growth Rate (CAGR), then it slowed to 17 percent, and now we are in a period of approximately 7 percent long term CAGR. These are maturing dynamics. This is a larger and more mature industry, and it’s acting like a larger and more mature industry.”

Whether the semiconductor market can shake off its woes and achieve growth in 2008 will hinge largely upon the industry’s performance in the second quarter, Ford predicted.

The first quarter will be seasonally slow, with revenue declining by 7.5 percent compared to the fourth quarter of 2007. However, revenue growth will rebound in the second quarter, rising by 4.6 percent sequentially.

With flat growth of 0.1 percent in the fourth quarter and an 11.8 percent increase in the seasonally-strong third quarter, the second quarter performance will be a key indicator of market momentum for the second half of 2008.
“This is where the fate of the year lies,” Ford said. “Whether the year turns out well or not, the second quarter is the best indication of what will happen this year.”