Home > Future Horizons, global semiconductor industry, global semiconductor market, Malcolm Penn > Semicon update Dec. ’09: Q4’s off to a great start; is ‘plan B’ in your back pocket?

Semicon update Dec. ’09: Q4’s off to a great start; is ‘plan B’ in your back pocket?

December 28, 2009

Here are the excerpts from the Global Semiconductor Monthly Report, December 2009, provided by Malcolm Penn, chairman, founder and CEO of Future Horizons. There are a lot of charts associated with this report. Those interested to know more may contact Future Horizons. (Nov. 2009 update has been  added! Please see deferred post dated Dec. 31 — Nov. 09 update: -10 percent growth In 2009, +22 percent minimum for 2010, says Future Horizons).

October set the fourth quarter off with a blast, with IC units up 9.2 percent versus the same period last year and a staggering 22.8 percent versus September 2009.

More importantly ASPs were up 5.3 percent versus October 2008, bringing the October 12:12 growth in value to plus 15.1 percent. This is the first such positive growth since July 2008. October’s strength also makes our 3 percent fourth quarter growth incredibly conservative, with no sign at all of a near-term industry bust.

With industry struggling to keep pace with second half-year demand, there has been no chance yet for inventories to be replenished after their Q4-08/Q1-09 purge. We are now condemned to enter 2010 with tight fab capacity and no excess stock. Already, device lead times are starting to feel the pinch; no one we speak to yet believes what the data is saying!

Ignoring the structurally (and typically) wild individual monthly fluctuations – which simply means no single month’s data is a good indicator of the underlying trends – October’s result places us safely within our current minus 10 percent 2009 growth estimate.

Having said that, even this revised estimate is now looking too pessimistic given future monthly 12:12 numbers will be measured against a dynamic whereby the 2009 numbers are trending up whereas the 2008 numbers were trending down, amplifying the impact of the 2009 positive monthly trends. We are on track for November to be the month when the monthly 12:12 growth rate breaks back into positive territory, as predicted in our October 2009 Report (August’s WSTS data).

Based on October’s data, it is now very difficult to see anything less than a 20 percent growth year for the semiconductor market in 2010 (our current forecast still look at plus 22 percent, as reported in last month’s Report) just based on the current industry momentum (i.e., a fourth quarter growth of around 6 to 7 percent) and a very ‘average’ quarterly growth pattern for 2010. Indeed, we are now starting to see the first industry guidance revisions that tend to indicate even this range might be low.

For sure the global economic outlook is worryingly fragile and there are many structural problems remaining largely unresolved. There are also new sources of volatility to be dealt with but the emerging economies are still in much better structural shape than the over-indebted rich world and these will continue to grow at around twice the rate of the established world economies, a structural trend that first started around 20 or so years ago.

Despite these macro economic concerns and unknowns, the fact of the matter is whilst there is an obvious link between the chip market and global economic growth rates this relationship is statistically very weak. The semiconductor market growth rate can thus fare much better (or for that matter much worse) than that of the overall economy due to the fact other factors such as ASPs, under/over capacity and inventory adjustments play a critical determining role in the overall market behavior.

It is also important to remember that the absolute size of the world economy is still very big – similar in size to what it was in 2007 – and there was no chip market bubble preceding the 2009 downturn. Yet, no one I have spoken to, has any real confidence in our analyses or the numbers, or for that matter in the longer term industry outlook!

This attitude is clearly entrenched in the recent WSTS fall 2009 forecast, published only a few weeks ago, which calls for a 0.5 percent growth in Q4-09 and 12.2 percent growth in 2010. This is also pretty much where the global industry consensus currently sits. The current reality is very different!

For only 0.5 percent growth in Q4 means a market size of $62.2 billion. With October already at $22.1 billion, November plus December would be only $40.2 billion. This means both must be lower than October’s run rate, which would indicate the market had already now peaked. There is absolutely no evidence to support this position; quite the opposite in face, there is every reason to believe that the market is strengthening, not weakening.

Even if Q4 were 0.5 percent growth, to then have only 12.2 percent growth in 2010 would require a quarterly growth pattern of something like: Q1 = -4 percent / Q2 = +0 percent / Q3 = +8 percent / Q4 = +2.5 percent. This implies a market collapse in the first half of 2010 followed by a very slow recovery for the second half of 2010. This too is not what is currently being experienced. There is no company out there experiencing or forecasting this kind of an outlook.

Even if November and December were flat versus October, Q4 would exhibit 6.4 percent growth over Q3. This now represents the bottom end of the likely range. In reality the odds are growth will be in the 7 to 8 percent growth.

Ignoring this upside, with Q4-09 at plus 6.4 percent growth, to keep 2010’s growth at the plus 12.2 level would need a 2010 quarterly growth rates of: Q1 = -6 percent / Q2 = -2 percent / Q3 = +5 percent / Q4 = +2 percent – a truly cataclysmic year and something that at this stage is simply not realistic.

Alternatively holding the original 2010 quarterly growth pattern constant but with a 6.4 percent Q4-2009 increases 2010’s growth from 12.2 to 18.8 percent, not a whole lot different from our 22 percent number.

The chances are 2010 will show much stronger quarterly growth rates than our current forecast is assuming, especially if prices start to harden during the first half year due to shortages, increased lead-times and product allocations.

We remain absolutely convinced that the industry has lulled itself into a false sense of security, which will hold for the first half of 2010 due to the normal first half year seasonal slowdown, only to collapse with a vengeance under the second half-year’s strength, by which time it will be impossible to do anything about it.

Only another major economic crisis can now derail the market recovery; in the absence of such a calamity, the baseline numbers have never looked as strong. Our New Year’s message to industry is thus, “By all means plan your budget and operations for a modest growth year but you better have a more aggressive Plan B in your back pocket.”  Happy 2010 and a prosperous new decade!

Industry capacity
The overall MOS wafer fab capacity decreased a further 0.7 percent in Q3 versus Q2-09, from 1890k 200mm equivalent wafer starts per week to 1877k.. Only 300mm leading edge capacity showed any increase in the quarter, at around 6.7 percent growth. These cutbacks add to the previous quarter’s 2.7 percent decline and compared with a 1.1 percent quarterly growth this time last year.

While some of the decline can be attributed to closing of older lines due to the recession, new lines were also affected as a direct result of the deliberate slowdown in capital expenditure that began mid-2007 before the recession started is now really starting to bite. Overall MOS capacity is now on a par with where it was in the first half of 2007.

At 644.8k wafer starts per week, Q3-09 200mm capacity continued its absolute value decline, from 679.7k in Q2-09, a fall of 1.9 percent. 200mm capacity is now down 21.1 percent versus the same period last year.

The 300mm wafers now account for 54.5 percent of the total MOS capacity, up from 50.7 percent in Q2-09 and 47.6 percent from the same period last year. 300mm wafers now account for over half the total capacity, with 200mm in second place at 35.5 percent, down from 36.0 percent in Q2-09 and 39.4 percent in Q3-08. Advanced capacity (i.e. 0.08 micron and below) grew 6.1 percent or 55.9k 200mm equivalent wafer starts per week, similar to last year’s equivalent 7.7 percent growth.

As predicted in our Q1-09 capacity review (June 2009 Report), due to the capacity cutbacks and recovering IC demand, total MOS IC Q3-09 utilisation rates continued their Q2-09 bounce back reaching 87.0 percent. The comparable figure for Q3-08 was 87.5 percent. Advanced IC capacity, i.e. 0.08 micron and below, also rebounded reaching 94.2 percent (from 90.2 percent in Q2-09), whilst 300mm and 200mm wafers checked in at 96.1 percent (Q2 = 91.9 percent) and 80.2 percent (Q2 = 72.3 percent), respectively.

As already mentioned, the fall in Q4-08/Q1-09 utilisation rates was the result of the massive order cancellations and demand collapse triggered by the September 2008 Lehman Bros collapse and was much faster and deeper than the 2001 dotcom driven recession. The Q2/Q3-09 bounce back reflected the start of the inevitable correction from this massive over-reaction, aided and abetted by a fundamental lack of overall capacity.

Given the significant cutbacks in cap ex since mid-2007, we expect to see utilization rates remain at these levels throughout the first half of 2010, tightening still further during the second half of the year. For utilization rates to be so high at the beginning of the recovery cycle has no historic precedent. 2009’s Cap Ex spend remains at ludicrously low levels with no significant increase anticipated until mid-2010. That means capacity will be tight through at least mid-2011.

We have said it before and we say it again. There will not be enough 2010 capacity in place to meet demand, 2011 will be even worse! This is a serious fab shortage about to happen. It will kill the fashionable – but fundamentally flawed – fab lite strategy stone dead.

Market trends – WiMax mobile, running out of time?
Mobile wireless data access is already with us in the form of mobile, or cellular, phones. Higher speed access is available using EDGE, W-CDMA and developments of CDMA2000 1x. 3G has been evolving with higher data rates available from High-Speed Download Packet Access (HSDPA) and High-Speed Uplink Packet Access (HSUPA) was available in some areas during 2008 with increasing availability in 2009.

Further developments in the pipeline include LTE and 4G, which will further increase bandwidth. These ‘mobile phone’ based technologies offer competition to WiMAX in the mobile broadband arena as opposed to fixed line broadband replacement options.

WiMAX was originally designed for fixed wireless access and is based around a new standard IEEE 802.16, it is also known as the WirelessMAN air interface. This technology is to be used in ‘the last mile’ in a Metropolitan Area Network (MAN), and will deliver wireless performance comparable to cable, DSL and T1 wired connections. IEEE 802.16 is one of a hierarchy of standards that has been created by the IEEE for the interoperability of wireless systems.

Uncertainty still remains on the suitability of WiMAX as a mobile technology. Mobile radio technologies such as WDMA-HSDPA, LTE, CDMA EVDO, IEEE802.20 or improved wireless LANs such as IEEE802.11n (in buildings) may well give good broadband access and better mobility.

WiMAX is already being considered as one of the broadband data components of 4G mobile radio. The idea is to make an interim solution using 3G plus WiMAX. This may persuade operators to move to WiMAX rather to an expensive LTE or 4G solution in one step.

Despite WiMAX infrastructure roll-out in South Korea, India, and the Middle East, there has been delay following delay in the USA. The last but one delay was instrumental in the US Sprint/Clearwire partnership breakup.

In other areas, such as in Europe, other projects are underway including the PIPE/.Freedom4 rollout in the UK but with very sparse coverage compared to other mobile broadband solutions. There are also concerns that there is little spectrum available in Europe for additional mobile allocation. WiMAX equipment suppliers including Alcatel Lucent and Samsung have had more success in the Far East (Korea, Japan, Taiwan, and Vietnam) and Africa rather than in Europe and the USA.

Any delays in WiMAX deployment leaves a gap to be filled by improvements to existing mobile broadband technology. Deployments of HSDPA are well underway and it looks like LTE will be following closely on its heels during 2010. The main argument for mobile WiMAX is that it would be cheaper and easier to deploy. This has not proved to be true at least for deployment worldwide.

Spectrum is needed for any mobile broadband technology (licensed or unlicensed) and there is little sign of many incumbent mobile operators with available spectrum taking up the WiMAX option.

Fig. A2 – Worldwide WiMAX Consumer Box Production, 2004-2013 (Millions of Units) Source: Future Horizons, UK

Fig. A2 – Worldwide WiMAX Consumer Box Production, 2004-2013 (Millions of Units) Source: Future Horizons, UK.

However, WiMAX is not yet dead despite these negative signs and we expect WiMAX to grow through the next five years even though the next 18 months will be a testing time for this technology.

Fig. A2 shows the Future Horizon’s unit production forecast for WiMAX consumer access boxes from 2004 to 2013. Production depends on increasing deployment by mobile operator incumbents as well as new entrants to the mobile telecommunications business. The economic downturn seen in 2008 and 2009 will delay higher growth till 2010.

Semiconductor spotlight – semiconductor LEDs
LEDs have now become commonplace in backlighting for notebook PCs and TVs replacing fluorescent backlighting in many cases. The use of these has grown from about 8 percent to an estimated 29 percent this year.

The popularity of the smaller netbooks with smaller screens has been a key factor. LED use will spread to larger screen formats and will represent the majority of backlight in these applications during early 2012.

In addition to these applications other LED lighting applications have also been growing, especially in the last two years. As a response to this demand, Cree has upped production capacity and staff this year. Other companies involved in LED production include SemiLEDS, Philip’s Lumileds in Europe and Seoul Semiconductor of Korea.

LED lamps are now available that can replace incandescent or even fluorescent lighting in some cases. It is already seen in flashlights, decorative lighting, traffic lights, supermarket shelf lighting, automotive lighting and architectural displays.

Daytime Running Lights (DRLs) are likely to be more widely adopted by the automotive industry. Canada and Scandinavia have been early adopters of DRLs and there is increasing evidence that DRLs are saving lives. Because of this, DRLs may soon become law in other countries. In the drive to save energy, customised LED DRLs will grow over the next few years and add to the other lighting uses of LEDs in automotive applications.

Approximately 20 percent of global electricity consumption goes on lighting. By 2020 at least half of this will be reduced by eliminating incandescent light bulbs and their replacement by LED or fluorescent lamps as well as improved lighting control. Summits like the current Copenhagen climate conference are likely to strengthen this trend. The good news for the semiconductor industry is that additional LED and semiconductor production will be needed to meet demand.

Another application for LEDs is in test, measurement and medical applications. The main use of LEDs in these equipments is in sensing, detection and analysis. A common medical application for LEDs is in a sensor that attaches to a finger to measure oxygen saturation levels in the blood. LEDs can be made with either inorganic or organic semiconductors.

The most common LED is the inorganic type. White LEDs are made of an InGaN-GaN structure that is covered with a yellowish phosphor coating. Since yellow light stimulates the red and green receptors of the eye, the resulting mix of blue and yellow light gives the appearance of white.

These products are continuously improving with several novel techniques being patented for high brightness and ultra high brightness LEDs by the main competitors in the market, namely GE, Osram and Philips.

Organic LEDs (OLEDs) are lighter in weight than inorganic equivalents, and polymer LEDs have the added benefit of being flexible. OLEDs are used in lighting and displays on curved surfaces such as lamps and wall decorations. OLEDs are also found in mobile phones and multimedia players.

Fully self illuminating displays are available that use an OLED matrix and these are currently available in some small screen TVs produced by Sony but these displays are very expensive and require complex driver circuitry.

The brightness of an LED depends on its forward current, and this has to be controlled tightly to avoid damage or severe reduction of lifetime. To meet this requirement, there is a growing market for LED driver/current controllers supplied by a number of companies including Cypress, Intersil, Maxim, Linear Technology, National Semiconductors and Texas Instruments.

Although the LED market is growing, one of the barriers to wider adoption is price. Despite the very high efficiency of LEDs in converting electrical energy to light, they are currently four to five times the cost of an equivalent fluorescent lamp.

However, reducing costs of production in the future are almost certain if the normal path of semiconductor development and competition holds true. The current drive to ‘save the planet’ will also help boost development and uptake.

On a more seasonal note, many more Christmas decorations supplied in retail outlets this year, including Christmas tree lights, have LEDs instead of incandescent lamps. In many senses of the word LEDs are, indeed, lighting the way.

  1. Pradeep Chakraborty
    December 29, 2009 at 8:15 pm

    One more thing — the global semiconductor industry continues to underspend on equipment! How will companies handle this aspect?

  2. Vikas Kapoor
    December 31, 2009 at 4:34 am

    Is ‘plan B’ in your back pocket? Interesting annalysis Pradeep. One aspect not touched upon though is, the conservative sentiment prevailing in end users, individual buyers, corporates, top management of most organisations, and last but not the least ‘semicon’ manufacturers. Is this not a dampener to growth?

  3. Pradeep Chakraborty
    December 31, 2009 at 7:17 am

    It is up to the end users to get out of their conservative mindsets! No one can do it for them, except themselves. It’s not that they’ve stopped spending — rather, they have been and are spending on a whole lot of other things. A positive attitude will certainly go a long way in changing the fortunes for the better of the semiconductor industry.

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