Electronics Industry Update

Staff -- Semiconductor International, 10/1/2001

Worldwide Sales of Semiconductor Devices	Manufacturers’ Shipments of Semiconductors
Historical Data: World Semiconductor Trade Statistics (WSTS) Forecasts: Semiconductor International	Historical Data: U.S. Department of Commerce Forecasts: Semiconductor International
Manufacturers’ Shipments of Computers	Manufacturers’ Shipments of Communications Equipment
Historical Data: U.S. Department of Commerce Forecasts: Semiconductor International	Historical Data: U.S. Department of Commerce Forecasts: Semiconductor International

Semiconductors

The total dollar value of worldwide semiconductor sales during the first six months of this year was 18.3% below the level for the first half of 2000. And although lower average prices continue to contribute to the market’s decline, weakening end-market demand for unit shipments is responsible for more than two-thirds of the industry’s recent misfortunes.

Unit sales of chips during January-June 2001 came up 13% short of the total for the first six months of last year. And lower average prices during the first half of this year pulled the market’s over-the-year loss in dollar-value terms more than five percentage points lower.

According to preliminary data released by the Semiconductor Industry Association, the value of chip sales this June increased by 28.1% from its May 2001 level. This was well below the average May-to-June gain recorded during the past decade, however. Semiconductor sales are highly seasonal, and are always higher in the third month of a quarter than during the first two months of that quarter. Unit sales rose a considerably more moderate 15.4% over the month.

On a three-month-moving-total basis - the preferred method of analysis for many, since it smoothes out erratic intra-quarter sales volume - the sales trend for semiconductors deteriorated for the 10th consecutive month during June. Average dollar volume this June dropped to a level 30.7% below its year-ago level; as recently as last August sales on a three-month-average basis were growing at an annualized rate of more than 50%.

Between May and June of this year, semiconductor sales rose in all four broad regions of the world for which the SIA summarizes data. But in all cases the sales level for this June came up well short of the total recorded during June 2000.

Following are the May-June semiconductor sales trends by major geographic region (with the 28.1% over-the-month increase in global sales value being the relevant point of comparison):

• The Americas: +37.6%
• Europe: +29.7%
• Japan: +14.9%
• Asia/Pacific (excluding Japan): +31.3%

The dollar value of chip sales to the Americas this June was 47.3% below its June 2000 level, a much steeper contraction than the 33.3% over-the-year decrease in worldwide sales. Through the first six months of this year, sales to the region trailed the January-June 2000 total by 29.1% (vs. the 18.3% global decline).

Sales to Europe during June 2001 fell to a point 28% below the June 2000 level. However, January-June 2001 dollar-valued sales to the region were off a comparatively moderate 14% from their total for the first half of 2000.

The estimated dollar-value of sales to Japan was 22.6% lower this June than during June 2000. Through six months of 2001, dollar sales to the country were running 7.2% behind the pace set during January-June 2000.

June 2001 chip sales to the (DRAM-heavy) Asia/Pacific market (all nations of the region, excluding Japan) were valued at a level 27.8% below their June 2000 total. Back in January, sales to the region were already off almost 24% compared to the same month a year earlier, so the market here has stabilized a bit after its steep plunge of late last year, even as conditions have continued to deteriorate in the rest of the world. For the first six months of this year combined, the value of chip sales to the Asia/Pacific region totaled 18.3% less than over the same period during 2000 - a downturn more severe than that experienced by Europe and Japan so far this year, but not nearly as bad as the over-the-year loss recorded in sales to the Americas.

Our revised forecasts show total semiconductor sales volume declining by 20-25% this year. However, we’re still expecting most inventory overhang to be worked through or written off by the beginning of this year’s final quarter, leading to gradual market recovery - and about 10-15% growth - during 2002.

End-Market Demand

Data compiled and published by the U.S. Commerce Department shows that the dollar value of shipments from U.S. manufacturers of computers totaled an estimated $6.24B during June 2001, down 6.2% from the May level. The value of June 2001 computer industry shipments was 18.5% below the June 2000 level; as recently as last December, industry shipments were running 38.4% ahead of their year-earlier total.

The estimated value of computers (inclusive of PCs, servers, laptops, etc.) shipped by U.S. manufacturers last year was $96.2 billion, an increase of 35.5% over the 1999 total. Between 1998 and 1999, computer shipments had grown by barely 7%, so 2000 was an unambiguously outstanding year for the industry.

New orders to U.S. computer equipment manufacturers fell 1.5% between May and June, following a decline of 6.5% the month before and of 5.3% during April. Through the first six months of this year, the value of computer shipments from U.S. companies was running 10.6% behind the January-June 2000 total, while new orders to the industry were down an even 10.0%.

Inventory levels at computer manufacturing firms fell 5.9% during June, following a sharp 4.5% decrease between April and May. The estimated value of inventory in the computer industry (including all materials/supplies, finished goods, and work still in process) was 4.3% less this June than during June of 2000.

This healthy draw-down/write-off of excess inventory sets the industry up for a healthy bounce back once business investment spending recovers and consumer spending growth accelerates. This won’t come to pass for several more months, though. Consequently, although we think that computer industry shipments will grow by about 13% during 2002, we’re forecasting a decline of 12.4% this year.

The messy burst of the Internet bubble and a dramatic slowdown in business investment spending have had a dramatic impact on the fortunes of this long-high-flying industry sector. The past several years have been outstanding ones for the industry. This year, however, non-defense communications equipment shipments are likely to fall at least 20% short of last year’s $110.7B total.

The value of shipments from U.S. manufacturers of non-defense communications equipment rose by a slight 1.1% between May and June of this year - but this was hardly enough to make up for the losses of 3.3% and 10.6% recorded over the prior two months. And shipments this June were a heart-stopping 24.1% lower than during June of 2000. As recently as last fall, industry shipments were still running almost 20% ahead of the level for the same month a year earlier.

And - ominously - new orders to the industry have weakened even more severely. The value of orders received by U.S. communications equipment manufacturers fell 12.9% during June, after plummeting by 15.7% (on a seasonally adjusted basis) between April and May and by 6.8% during the prior month.

Through the first half of 2001, the total value of new orders received by non-defense communications equipment manufacturers was worth 34.8% less than during the first six months of 2000. Shipments during the same six-month period were off a less-precipitous 20.2% from a year ago - which simply means that there’s more room on the “down” side in the months ahead given the much steeper drop-off in orders volume.

For 2000 as a whole, the value of non-defense communications equipment shipments rose 19.3% over the final 1999 total. Orders grew at a reasonably healthy rate as well - but with 2000’s increase of 14.1% running well behind the gain in shipments, it was no great surprise that shipments growth faded during the first half of 2001. And the orders total through June of this year suggests a deepening of this downward trend for shipments volume in the months ahead.

Business investment in network infrastructure, Internet commerce applications, and mobile communications has fallen sharply over the past nine months. And economic weakness in much of the rest of the world limits the gains that can be achieved through export expansion.

But the industry’s malaise should be mercifully short-lived. Manufacturers have taken steps to get bloated inventories under control - industry inventory levels fell 7.7% in March, 4.8% during April, 0.4% in May, and by another 1.0% during June. Inventory levels this June were down a sharp 12.6% from the levels measured during June 2000. This drawing-down/writing-off of inventories will put companies in much better shape to aggressively respond to future demand recovery.

We’re looking for industry shipments to grow by about 6% next year (still only about half as strong as the increase recorded between 1999 and 2000), as U.S. business capital spending bounces back gradually, and pulls demand from the rest of the developed world up with it. But this will follow a decline of about 21% this year and will leave 2002 shipment values still above 15% below 2000’s record level.