It’s Q1 seasonal slowdown, and yearly time for denial!


This is a summary by Malcolm Penn, CEO, Future Horizons. For those who wish to know more, please get in touch with me or Future Horizons.

Malcolm Penn, CEO, Future Horizons.

Malcolm Penn, CEO, Future Horizons.

December’s WSTS results were as boring as they were predictable, with no serious data revisions (thankfully) and the results right where we expected. December’s year-on-year IC unit growth was 8.9 percent that, with the 3.5 percent growth (yes GROWTH) in ASPs, yielded a respectable double-digit value growthof 12.8 percent. And this, on the back of a weak Q4 memory market that saw ASPs fall 13.1 percent vs Q3-10!

The yearly growth vs 2009 weighed in at 31.8 percent, hitting $298.3 billion, just shy of the elusive $300 billion threshold. The market is right where we said it would be at our recent 2011 Forecast seminar; we reiterate our position that 2011 will be a good year for the industry. Choppy first-half waters for sure, but watch out for a whopping 2H-11 ricochet.

Connectors are up as well
It is not just semiconductors that are off to a good start. The connector industry is tight as a drum too. Orders in December 2010 were up 13.3 percent versus December 2009, with full year orders up 29.3 percent on 2009, down sequentially 11.1 percent from November 2010. The comparable data for sales was plus 18.7percent, plus 28.4 and minus 13.7 percent.

The December connector book-to-bill ratio was 1.01, unchanged from November. This industry still publishes orders and book-to-bill data by the way, unlike the chip industry which very foolishly stopped publishing this several years ago. All this in the seasonally slow first quarter of the month, yet few people believe there is a supply problem in prospect. Just as this time last year, industry denial is rampant, way beyond reasonable caution and ignoring the underlying trends.

Strong demand for mobile, server and graphics DRAM
We estimate that the worldwide growth rate for PCs in 2011 will be a healthy 10 percent, with 3.9GB the average DRAM content per box. New capacity and die shrinks are putting near-term pressure on over-supply and pricing but there are now move afoot from Elpida and others to start raising prices.

Where they can, to gain a price advantage, DRAM vendors are actively adjusting their supply in favour of mobile from commodity DRAM, given the current strong demand in the smartphone and tablet PC markets, with a 1GB per box average DRAM content.

Server demand continues to be the other star segment, not just in unit demand but in content per box as well, estimated to average around 30GB in 2011. This will drive a 50 to 60 percent increase in server DRAM demand. Finally in graphics demand for specialty DRAM is also very strong, driven by the rapid take off of3D-TV and continuing strong growth in Blue-Ray DVD.

The overall DRAM industry is thus gradually diversifying from manufacturing mainly commodity DRAM to diversified products such as mobile DRAM, serverbasis DRAM, specialty DRAM and graphic memory.DRAM vendors however are faring mixed fortunes, with Elpida and Hynix having the worst net cash positions with barely enough cash to cover their short-term debt.

The Taiwanese vendors find themselves stuck in a technology trap, unable to invest in the immersion technology needed to break through the 5*nm node, meaning that in the absence of a good market uptick to improve cash flow and profits, a shake out in the DRAM supply base seems unavoidable.

TSMC digs in for growth
In its January 2011 (Q4-10) investor relation’s webcast, TSMC forecast the semiconductor market to grow 7 percent in 2011, in line with our own expectations, with its revenues increasing a massive 20-22 percent year-on-year. This exemplary performance is attributed to their anticipated share gain in advanced and specialty technologies.

They are continuing to out-invest their mainstream foundry competitors in both CapEx and R&D, increasing their leadership technology and manufacturing gap, and have been running at full utilization for the past seven consecutive quarters. Despite their massive billion Cap Ex spend in 2010, the firm expects to be running at 100 percent utilization throughout the whole of 2011.

Both they and UMC were forced to cancel or reduce maintenance downtime during the Chinese New Year holidays in response to the high levels of orders their production lines are struggling to cope with. This had never happened before; typically firms set aside two to three days during Chinese New Year holidays for their annual maintenance program.

The temptation of do this is, along with cutting back on engineering access, restricting wafer variety runs and ignoring small volume/low yielding device orders, is an obvious one during periods of tight capacity but not doing annual maintenance might just backfire later in the year. There is a real danger that yields will start to uncontrollably drift as a result of skipping the annual-maintenance. That would carry a massive risk for the world’s IC makers, affecting every single Fabless and Fablite vendor alike.

The supply chain remains tightSigns of a normal first quarter seasonal slowdown are now scarcer than hen’s teeth. TSMC’s 4Q10 wafer sales (the industry’s 1Q11 IC sales) were essentially flat on 3Q10; the outlook for 1Q11 (2Q11’s IC sales) is also ‘continuing flat’.

There is simply no breathing space left in the supply chain and no chance to catch up before the 2H11 seasonal rebound. As we said in January’s Report. We are in for a very strong year indeed. Fab-Tight is the new Fab-Lite.

Several OEMs are already reporting component-restricted production problems and foundry capacity remains tight and overly stretched. Notably, it was widely reported that Hewlett-Packard (HP) was forced to revise downward its notebook shipment goal for January due to a delay in shipments of some key parts and components from upstream suppliers, including CMOS sensors and CPUs.

The shortage in the supply of CMOS sensors has been aggravated by the strong demand from the smartphone and tablet markets in addition to laptop and notebooks. The real culprit however is no one gives any long-term order commitments any more making supply-chain planning, difficult at best, planningimpossible. Complete madness, given the complex long supply chain logistics.

Add to that Intel’s move to push notebook makers from the mainstream Huron River-based CPUs to i3-370 by supply chain restrictions it is easy to see how OEM shipments are easily impacted by the resulting CPU supply/demand mismatch. There is a clear warning here to all fabless and fablite firms alike, no wafers, no ICs – and no sales for you or you OEM customers (see also our September 2010 Monthly Report editorial – “No Wafers, No Cry”).

That is the real strategic value of IDM. In CPUs, Intel controls the OEM sales channel (by deciding which CPUs to wafer fab) in the logic market, for ‘Intel’ read ‘foundries’ (i.e. THE foundry!), especially as we move down to sub-30nm technology. Dual foundry sourcing was never a problem at 90nm and above, at 32nm and below, there will be no second source possible, porting a design simply will not be an option.

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