Outlook for semiconductors and the value chain in 2014

CorbettMike Corbett, Linx Consulting and Duncan Meldrum, Hilltop Economics

We approach 2014 with a combination of positive policy, financial, and economic forces that will push world growth up to a +3% range.  With positive developments on the U.S. policy and jobs front, slow progress in Europe, and stabilization in Asia, the outlook for reasonable global growth in 2014 looks better than it has since the first year of recovery from the recession of 2008-09.

For the last few years, economic forecasts from most private and public forecasting groups were downgraded consistently as time passed as forecasters adjusted their longer term forecasts downward for the weaker capital accumulation that has occurred in this recovery.   That process finally appears to be ending.  The latest forecast revisions by Consensus Forecasts have been much more balanced, resulting in a barely perceptible upward revision to the world growth outlook.

Linx Consulting and Hilltop Economics have worked to tie global economic output to silicon demand, through a proprietary modeling service. Silicon demand, expressed in terms of millions square inches (MSI) is now projected to grow 6.5% in 2014. This is stronger outlook is based on demand improving, some snap-back from the Q4 slippage, and lower uncertainty around policy.

While this growth is a welcome relief from the relative stagnation for the last few year, and we have seen prices increase in traditionally price sensitive markets such as DRAM, this does not mean that the industry is on the path to sustained profitability, as it is entering an era of unprecedented change. There is fundamental industry change as the market re-aligns itself to transition from the PC era to the mobile era as well as architectural and technology changes. Key architectural changes being implemented include changes in both memory and logic devices, with the introduction of FinFETs and 3D NAND and MRAM, etc. Key technology changes the implementation of EUV lithography, novel materials as well as the introduction of 450mm wafers.  All of which have inherent risk and need to be adequately funded and developed through to commercialization.

We already see the industry value chain re-aligning to face these major challenges.  There are fewer IDMs investing in advanced node manufacturing; consortia are being reorganized and set up to help with the basic research; OEMs are consolidating to produce the scale required to bring new technologies and processes on-line; and, the chemicals and materials suppliers are starting to gain more knowledge on upstream suppliers for quality issues and some are exploring their strategic options for their electronic chemicals and materials business.

The semiconductor industry has a long history of success based on continued innovations in the business model, advanced technological solutions and forward thinking vision.  Change is also a certainty in this industry.  In order to address the long list of challenges above, we believe that not only will new collaborative models be required, but they must be funded on a sustainable basis as well. Ensuring sufficient funding and profitable returns on R&D and capital investments will be a challenge for the entire industry.

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