For 2010, marketplace optimism abounds


Booming. Recovery. Upturn. Choose your favorite optimistic word, and that is what many analysts surveyed by Solid State Technology are using to describe the semiconductor market outlook for 2010. "The forecast tea leaves have rarely looked better," says Malcolm Penn of UK-based Future Horizons.

A world economy seemingly on the rebound, low inventories, and maximized fab capacities are among the reasons analysts are upbeat. In addition, new products and leading edge technologies are likely to help fuel the rebound, analysts say, including production at 32nm for logic devices and NAND Flash memory getting up to speed, and increasing 4Xnm process DRAM production.

But tempering the enthusiasm are uncertainties concerning unemployment, consumer spending, and some economic prognosticators' belief that a second dip in the market will occur before a long-term recovery takes hold. Gartner analysts Bob Johnson and Klaus Rinnen add, "we are also hearing rumblings about possible shortages and short term allocations of some parts as the industry recovers from one of the most violent down cycles in its history. As for the longer term, the key question for the coming decade still is how to prosper in a slowing growth environment."

For the next 12 months, however, Jim Feldhan, president of Semico Research, points to continued consumer enthusiasm for cutting edge handheld and wireless devices (and the memory and logic required to run them) as a significant indicator of a market rebound from 2009.

"The recovery is real," sums Feldhan. "Although consumers may not spend as much during the holiday season, electronic devices are definitely on the gift list. In 2010, we'll be entering the year with high capacity utilization rates and an economy that is starting to expand."

Here's more of what analysts are saying for the year ahead:

Back to normal abnormality

This time last year the market was in freefall, the victim of a collapsing world economy. As a result, Q4-2008 sales sequentially fell an unprecedented 24% followed by a further 16% fall in Q1-2009. With Q1-2009 now 30% down on the previous year, little wonder our forecast called for a 28% overall decline.

Click to EnlargeMalcolm Penn, chairman & CEO, Future Horizons, Kent, UK

Then came Q2 and an equally dramatic bounce back, up 17% on Q1-2009 versus the zero to small single digit growth norm. Clearly, the market was responding to a cut back too far, and this data point alone was enough to drive the forecast up 14% points to only –14%—still bad but euphorically better than the –28% abyss.

Turning to 2010, the forecast tea leaves have rarely looked better. First, the world economy is recovering, with all economists forecasting low positive 2010 GDP growth. And with inventories still low, new units must be built, which means we should see a reasonably strong SC unit demand. ASPs are also on the upturn, despite the recession, mostly due to structural and mix effects but also to memory price increases.

Finally, fab capacity is starting to look tight, squeezed by fab closures and a two-year capex famine. 2009's capex (2010's capacity) ran barely US$1 billion per month, or only 5% of sales. While the number stabilized in the second half of the year, capacity is already getting tight and will only get tighter; already, the foundries are starting to talk allocation.

The foundries' profitability is also at an all-time low, at a time when they are being asked to carry an ever-increasing share of the wafer-processing burden. This is economically unsustainable, especially with allocations; 2010 foundry wafer prices will rise, putting an even greater pressure on IC ASPs.

We, therefore, have the inverse of the 2001 perfect storm: a strengthening world economy, robust unit growth, little excess inventory, tight wafer fab capacity, continuing low levels of capex spending, and increasing ASPs. Even benign quarterly growth patterns of ±2 (for two quarters), followed by +12 and +3, yields a year-on-year growth of +19%. If allocation kicks in, this could go a lot, lot higher. Watch out for 2010-11 to be a re-run of 1993-95.

New growth and opportunityfor the semiconductor industry

2010 will be a good year for the semiconductor industry. Semiconductor revenue will see double-digit growth levels for the first time in years, as the recovery in the end user markets gains steam, driven by a return to growth in global markets. All levels of the supply chain will benefit, from increased materials purchases to a revival of capital investment for capacity and new technology.

Click to EnlargeBob Johnson, VP Research, Gartner, San Jose, CA USA

Yet, despite the good news, there are concerns about the strength of the recovery. Unemployment still stands at historically high levels, and will likely continue that way for some time. Consumer spending is once again driving market growth, but consumer confidence is shaky at best, and industrial buying has not yet recovered to a large degree. Only time will tell whether we will see a second downward leg in industry growth before a long-term sustainable recovery sets in.

Click to EnlargeKlaus Rinnen, Managing VP, Gartner, Washougal, WA USA

As in past recoveries, this one will also be driven by new products and leading edge technology. Production at 32nm will begin in earnest in 2010 for logic devices and NAND Flash memory; and in DRAM, companies are racing to reach production in the 4Xnm process realm. Most current capital investments are for technology upgrades, with little new capacity coming on line for the near future; however, lead times for critical equipment types are pushing out availability and may put a short-term damper on technology improvement projects. We are also hearing rumblings about possible shortages and short-term allocations of some parts as the industry recovers from one of the most violent down cycles in its history.

So, 2010 will see excitement return to the industry as it grapples with the problems of handling a return to double-digit growth and the introduction of new technology into the marketplace.

But even two years of double-digit growth will only get us back to where we were before the recession hit hard. As for the longer term, the key question for the coming decade still is how to prosper in a slowing growth environment. Gartner believes the industry will respond to this long-term challenge with significant changes in its underlying dynamics, competitive landscape, and business models and practices.

After the global recession,a booming market on the horizon

In 2009, a global GDP decline of -0.8% marked the worst global recession since 1946. In 2010, global GDP growth is expected to rebound to 3.4%, just 0.2 percentage points under the long-term average GDP growth rate of 3.6%. In 2009, worldwide electronic system sales decreased 10%, only the third annual decline in history. Directly impacted by the economic recovery, total 2010 worldwide electronic system sales are forecast to register an 8% increase.

Click to EnlargeBill McClean, President, IC Insights, Scottsdale, AZ USA

While global recessions are certainly traumatic for many people and businesses throughout the world, they typically have set the stage for a booming semiconductor market. Over the past 30 years, the world has endured four global recessions, and after every one of these recessions, a booming semiconductor market immediately followed! Moreover, the strong semiconductor market that followed the global recession has always lasted at least two years.

Driven by relatively low oil prices, record low worldwide interest rates, and economic stimulus packages from the U.S., China, Europe, Japan, and other countries that total more than $2.0 trillion (with 60% of the stimulus expected to be spent in 2010), the worldwide economy and semiconductor markets in 2010 are forecast to show a strong rebound from the poor performance exhibited in late 2008 and the first half of 2009.

In the aftermath of the 2008-2009 global recession, IC Insights forecasts that the 2010 IC market will grow 15%, followed by even stronger growth in 2011. Worldwide IC unit volume shipments are forecast to increase 15% in 2010, up significantly from an 8% decline in 2009.

After falling 37% in 2009, worldwide semiconductor industry capital spending is forecast to increase 18% in 2010; however, as a direct result of the steep capital spending declines in 2008 and 2009, the capital spending as a percent of sales ratio reached an all-time low of only 12% in 2009. Even with a moderate rebound in spending in 2010, IC Insights believes that there are likely to be major consequences (e.g., surging IC average selling prices, capacity shortages, etc.) from the 2008-2009 capital spending collapse.

Given the world's almost insatiable demand for ICs, it is only a matter of time before the impact is felt in the way of longer lead times, spot shortages, and higher average selling prices for many IC devices.

It's upturn time again

About the best thing that can be said about 2009 is that it's nearly over. The meltdown that reached a head with the stock market collapse of October 2008 dragged semiconductors down just when the 2008 overcapacity should have been burned off. Although a typical semiconductor cycle would have driven growth in 2009, softening demand extended the market's malaise. Objective Analysis sees the year ending about 19% below 2008, with revenues of about $205 billion.

Click to EnlargeJim Handy, Analyst, Objective Analysis, Los Gatos, CA USA

What does 2010 hold in store? From a global economic standpoint, things are still very fuzzy—many economists and armchair pundits are calling for a second dip in the recession. We don't know about that, and soft demand makes it tough to forecast with confidence, but if the market plays out the way that semiconductors have for the past four decades (and the past nine cycles), then 2010 should be a very good year indeed.

So far, demand has not been as significantly impacted as many anticipated. True, cell phone unit shipments are down by 10% and PC units are expected to decline by 2%, but there is strength in other sectors. Feature phone sales are up. Set-top box sales are expected to rise 4%. Overall memory bit growth is still very positive.

Memory prices, a leading indicator for the rest of the semiconductor market, have been flat for most of this year after plunging nearly 40% from the third to fourth quarters of last year. As a general rule, flat memory prices set the stage for important revenue growth in the following year. If demand continues (depending on the world economic picture), then bit growth will maintain its current level, if not strengthen. Flat prices cause revenue growth to match bit growth. With modest bit growth projections for 2010 of 75% for NAND and 40% for DRAM, we should expect combined memory revenue growth of about 55%.

In past cycles, semiconductor growth is about two-thirds that of memories. Assuming 2010 follows this trend, we should anticipate overall semiconductor growth of 35% or better. I am sure that the many hurting vendors and unemployed semiconductor professionals will join Objective Analysis in saying: "It's about time!"

Yes, Virginia, the recovery is real

The economy hit an upswing in March 2009, which is the exact month Semico Research predicted sales would begin to increase. Much of the global news across different industries is still negative, with foreclosures and poor consumer credit continuing to dominate the headlines. Unemployment remains high but employment is always a lagging indicator. Semico believes the recession ended in third quarter 2009. Even with the weak economy, there is some good growth in markets directly related to semiconductors.

Click to EnlargeJim Feldhan, President, Semico Research, Phoenix, AZ USA

On the consumer side, e-readers are gaining more and more popularity, as well as smaller HDTVs and netbooks. With Apple and Microsoft both releasing updated versions of their MP3 players, the small dollar consumer market is headed into a strong fourth quarter, and 2010 is looking up.

Semico forecasts total worldwide semiconductor revenue to decline 12.5% to $217.5 billion in 2009. But the recovery will be in full swing in 2010 when the industry will experience a revenue growth of 18% to $262.7 billion.

The PCB book-to-bill ratio points to improved markets in the coming months. The combined book-to-bill ratio has been positive for the last five months after being negative for the prior 12 months.

On the memory front, NAND prices have been on an upswing since November 2008. This recovery has been driven by reduced capacity expansion, restocking the supply chain, and consumer spending on electronics. Average prices for NAND bottomed in 2008 at $2.75, and by August 2009 had reached $3.80. The rebound in NAND has been so strong that revenues in 2009 will be flat or slightly positive compared to 2008. In 2010, NAND revenues will grow 21% to $14.5 billion.

2009 is the year when DDR3 DRAMs came into their own. DRAM prices have been on the rise since December 2008, growing from $1.20 to $1.57 by August 2009. DRAM revenues will be down 27% in 2009, followed by a recovery of 15% in 2010. Some of the MOS logic categories actually saw double-digit growth in 2009 and will continue that trend in 2010. Devices that find sockets in wireless, handheld, and other consumer products, such as HDTVs, are showing strong growth trends.

In conclusion, the recovery is real. Although consumers may not spend as much during the holiday season, electronic devices are definitely on the gift list. In 2010, we'll be entering the year with high capacity utilization rates and an economy that is starting to expand.

HDDs will boom in 2010

Late in 2008, as banks were faltering and the stock market was melting down, the economic storm clouds were seemingly so dark that any silver lining seemed impossible. However, consumers proved resilient in 2009. PC prices fell to unprecedented levels, thanks in no small part to the emergence of the low-cost "netbook." And the cost-effectiveness of HDDs snuffed out SSD's initial foray into mobile computing. While SSDs are evolving and are finding a place at the table, HDDs are still the storage medium of choice for servers, PCs, and a host of consumer electronics devices.

Click to EnlargeMark Geenen, TrendFOCUS, Los Altos, CA USA

The netbook has proven to be a catalyst for a restructuring and repricing of the mobile PC market. For $300 or less, a full-function PC can be secured that will fit the needs of most consumers or businesses. Now, the average price of notebook PCs is in the $600-$700 area—roughly half of where it was just two years ago. More and more buyers are opting for mobility, so the notebook PC market is rapidly expanding. Interestingly, HDDs will continue to dominate, despite all of the articles and blogs that have declared SSDs as "HDD killers." Well under 5% of all notebook PCs will employ SSDs in 2010, and until prices and capacities improve, HDDs will reign supreme.

External HDDs continue to offer unprecedented value. Whether it's for data backup or just more storage, users are taking advantage of attractive pricing to purchase hundreds of gigabytes of capacity, often for less than $100. Capacities are now at 2 TB for 3.5" externals, and 1 TB for 2.5" mobile externals.

Digital video recorders (DVRs), IPTVs, and the like continue to enjoy broadening appeal around the world. With tens of millions installed and demand on the rise, HDDs have another avenue of growth. High-definition recording is boosting HDD capacities in DVRs, proving once again that users cannot have enough storage. As digitization of content pervades, HDDs will be the cost-effective king of mass storage.

Technology developments will pave the way for multiple-terabyte mobile HDDs within two years. New technologies, such as discrete track recording or bit patterning, promise to push HDD capacities higher. Of course, SSDs are finding homes in enterprise applications that need higher throughputs, and in specific portable computing applications. Performance and durability concerns are being addressed, although cost and capacity are far from allowing SSDs to compete with HDDs across the storage spectrum.

With a stabilizing global economy, Windows 7, and a long-overdue PC upgrade cycle on the horizon, data storage requirements will continue to grow in 2010. PC shipment growth will approach double digits this year, and most of that expansion will be served by HDDs. Maybe we'll see a long-promised combination of HDD and SSD technology that offers the best of both worlds—perhaps as early as 2010.

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