Semiconductor Industry Revenue to Endure Slow Growth in 2012

Feb 8, 2012 11:34 AM

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With global economic prospects remaining uncertain and semiconductor inventory not moving quickly enough to stimulate new production, the worldwide chip market is expected to suffer a slow year in 2012 marked by sluggish growth.

Semiconductor industry revenue in 2012 is expected to reach $323.2 billion, up a slight 3.3 percent from last year?s revenue of $312.8 billion, according to an IHS iSuppli Global Manufacturing Market Tracker report from information and analysis provider IHS,

While expansion this year is expected to be better than the paltry 1.25 percent increase of 2011, the overall picture could brighten considerably if the United States and the rest of the world recover in 2013. Under such a scenario, growth from 2013 to 2015 will average between a more encouraging 6.6 to 7.9 percent, as shown in the figure below, with total semiconductor revenue by 2015 rising to some $397.7 billion.

"Much of the weak performance in both 2011 and this year can be attributed to external circumstances over which the semiconductor industry has no control?the ambiguous state of the global economy, along with assorted troubles in the world?s major markets of the United States, Europe, Japan and China," said Len Jelinek, director and chief analyst of semiconductor manufacturing research at IHS. "And because the world economy is not in a strong-enough position to drive growth, the semiconductor business is coming under pressure."

Although consumer spending lowered the level of inventory of electronic devices and other items incorporating semiconductors during the 2011 holiday season, the reduction was insufficient to re-energize chip demand to replenish stockpiles. Worse, a deliberate decrease in manufacturing run rates by companies in the third quarter of 2011 proved unable to bring inventory down to levels that would have fired up additional orders and increased factory run rates. As a result, semiconductor demand for manufacturers will remain depressed until the second quarter of 2012.

Such developments will have a ripple effect throughout the industry. For instance, because factory utilization will not recover until the middle of 2012, the integrated device manufacturers (IDM) that both design and manufacture semiconductors in-house will experience even greater stress to simply maintain the viability of underperforming factories. And with current manufacturing capacity deemed acceptable for meeting demand, most capital expenditures to boost efficiency within the industry likely will be pushed out to 2013.

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Semiconductor Inventory Declines as Suppliers Adjust to Slow Market Conditions

Chip inventories held by semiconductor suppliers declined in the third quarter of 2011, putting a halt to the steady expansion of the previous seven quarters, as the industry cut production in order to reduce oversupply. As calculated by the days of inventory (DOI) measure, semiconductor stockpiles in the third quarter stood at 81 days, down a modest 2.5 percent from 83 days in the second quarter, according to an IHS iSuppli Inventory Insider report.

The DOI level had been on the rise since the third quarter of 2009 when it stood at just 65 days-a time when stockpiles were low because production had been reduced during the dark days of the recession. Since then, inventory DOI had been creeping up, as shown in the figure below, partly to make up for depleted stocks, and also to cope with growing demand as strength returned to the supply chain. However, amid signs of weakening growth in the semiconductor market, the rise in inventory had generated concerns. Global semiconductor revenue in 2011 is estimated to have risen by a scant 1.9 percent, compared to a forecast of 7 percent growth issued early in the year.

Semiconductor inventory levels are an important gauge of industry health, and the stockpile amount at any point in time also indicates the confidence-or lack thereof-of the supply chain in its forthcoming prospects. Too little inventory suggests caution for possible hard times ahead as manufacturers expect demand to ratchet down; but too much inventory is also a problem, fueling worrisome oversupply that forces down pricing.

"For the third quarter, semiconductor suppliers began an inventory correction to alleviate an escalating oversupply situation on top of already inflated stockpiles," said Sharon Stiefel, semiconductor analyst at IHS. "With the global economy all but stalled, and in the face of declining orders as well as decreased visibility, many semiconductor manufacturers opted to reduce capacity utilization. And with lead times now declining to normal levels after extended periods of waiting in the past, manufacturers were more confident about trimming bloated inventories this time around without fear of causing too much pain to the supply chain."

Despite the inventory cutback, DOI in the third quarter remained elevated in absolute terms-the highest of the last 10 quarters, dating all the way back to the fourth quarter of 2008-suggesting that stockpiles are still quite high. Moreover, the percentage of oversupply during the period rose to 12.1 percent, exceeding the 11.1 percent spike in oversupply during the fourth quarter of 2008. As a result, expectations are that inventories will be trimmed further in the fourth quarter of 2012.

Among the various semiconductor sectors, inventory levels rose for handset original equipment manufacturers, distributors and analog companies-all of which posted percentage gains in DOI. Stockpiles, however, fell for fabless semiconductor makers, memory suppliers, foundries, PC original equipment manufacturers, storage gear companies and electronic manufacturing services providers.

For mobile handset manufacturers, inventories increased in the third quarter as suppliers prepared for their seasonally busy end-of-year period. In comparison, inventory at pure-play foundries declined more strongly than expected-the result of a reduction in utilization rates.

Total DOI is estimated to have declined another 2.5 percent in the fourth quarter to 79.3 days, IHS predicts. "Visibility continues to be murky in many sectors given the volatile world economy, and demand remains difficult to predict," Stiefel warned.

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