Electronics Industry Update

Worldwide Sales of Semiconductor Devices	Production Trends & Forecasts of Electronic Components
Historical Data: World Semiconductor Trade Statistics (WSTS) Forecasts: Semiconductor International	Historical Data: Federal Reserve Board Forecast: Semiconductor International
Production Trends & Forecasts of Computers	Production Trends & Forecasts of Communications Equipment
Historical Data: Federal Reserve Board Forecast: Semiconductor International	Historical Data: Federal Reserve Board Forecast: Semiconductor International

Semiconductors

The total dollar value of worldwide semiconductor sales during the first nine months of 2001 was 28% below the level recorded over January-September 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 downturn.

Unit sales of chips during January-September 2001 came up 18.9% short of the total for the first three-quarters of 2000. And lower average prices through the third quarter of 2001 pulled the markets’ over-the-year loss in dollar-value terms about another nine percentage points lower.

According to preliminary data released by the Semiconductor Industry Association, the value of chip sales last September increased 34.3% over its August 2001 level. Unit sales improved a less robust 21% over the month. Between the same two months of 2000, unit sales volume improved 11.1%, while the dollar value of total sales increased by 17.1%. So, last September’s gain was fairly impressive, compared with the trends during 2000 — and just might indicate that the worst is over for the semiconductor industry.

The average price received for all types of semiconductors sold last September was $0.473. This was 11% more than what was received for chips sold the month before — but remained 19.3% below the average price received during September 2000.

Dollar-valued microprocessor sales volume rose 59.8% between August and September 2001, but the value of MPU sales last September was 31.6% lower than during September 2000. Although microprocessor sales were on a roller coaster throughout 2001, the underlying trend is clearly on the downside. Through the first nine months of 2001, the value of worldwide microprocessor sales fell 27.6% short of the January-September 2000 level.

DRAM sales volume rose by an encouraging 13.8% over September 2001, but through the first nine months of the year total DRAM shipments trailed the year-ago dollar-value total by 59.9%. DRAM sales volume during September 2001 was worth 74.9% less than the volume recorded during September 2000.

The dollar value of all discrete and optoelectronic chips sold through September 2001 held up relatively better than either the microprocessor or memory segments of the market, recording a loss of a (relatively) moderate 22.2% over the year. However, last September’s shipments were only worth about 59% as much as during the same month of 2000, and continued losses in communications equipment end-market sales were expected to pull this number even lower over the balance of the year.

The average price for all integrated circuit devices sold worldwide rose by 8.6% between last August and September, but was 21.8% lower in September than during the same month the year before. Average DRAM prices moved higher — if only slightly — for the first time in 13 months during September 2001. The average unit price of a DRAM chip sold during the month was $1.752 — an increase of 1.6% from the August level. Still, DRAM prices last September averaged 79.7% less than in September 2000.

On a three-month-moving-total basis — the preferred method of analysis for many since it smoothes out erratic intraquarter sales volume — the sales trend for semiconductors deteriorated for the 13th consecutive month during September 2001. Average dollar volume for that month dropped 44.6% below its year-ago level; one year ago, sales on a three-month-average basis were growing at an annualized rate of almost 50%.

End-Market Demand

Estimates from the Federal Reserve Board’s monthly industrial production survey show that computer/peripherals industry output declined for the 10th consecutive month during October 2001. However, it was at least mildly encouraging to note that output slipped by only a relatively modest 0.5%. Since this followed a steep 2.5% drop the month before — and was only about one-half the average monthly rate of decline recorded over the first three-quarters of 2001 — the industry is showing some possible signs of bottoming out.

SIC 357 output soared by 57.7% during 1999 and by almost 44% in 2000. But by October 2001, production levels at U.S. computer equipment manufacturing firms were running 9.2% below the activity level of one year earlier. Nevertheless, through the first 10 months of 2001, cumulative industry output totaled 8.5% more than over January-October of 2000, thanks to a still-solid level of growth achieved during the first four months of 2001. But over-the-year gains faded fast during the late spring and early summer, and have now been negative for three consecutive months.

Given these discouraging trends, it now looks like we will see the computer/peripherals industry expand output (i.e., essentially unit-count production) by only about 4% during 2001, despite the double-digit gains recorded during the first half of the year. But if in fact — as we believe — production declines bottom out during the final quarter of the year, then total industry output growth should begin to bounce back — slowly, but surely — by the spring, and ultimately bring full-year 2002 industry production about 7% above 2001’s depressed level.

Output from the nation’s communications equipment industry is estimated to have declined by 1.9% between September and October 2001. This followed production losses totaling almost 16% over the preceding eight months, and brought overall industry output down to its lowest level since April 2000.

Cumulative 2001 communications equipment production through October 2001 was still 6.5% higher than during the first 10 months of 2000. But last October’s output total was 13.4% lower than in October 2000 — the first time since the second half of 1991 that four consecutive months of unit production from U.S. communications equipment manufacturers have fallen below the production level of one year earlier. During the final month of 2000, output from SIC 366 manufacturers was expanding at a 35.5% annual rate. But production during the past four months has been contracting at an annualized rate of nearly 10%.

Overall U.S. communications equipment manufacturing industry output grew by 13% in 1999 and by another 24.3% in 2000. But it’s now abundantly clear that corporate America over-invested in communications infrastructure, and that the resulting excess capacity will take several years to be fully absorbed — even with a continued reasonably healthy pace of demand growth.

Despite this still-deteriorating market environment, however, the sheer momentum of the industry — and the final remnants of a backlog from the very healthy level of industry orders placed during the early months of 2001 — should allow SIC 366 to eke out a production gain of about 1% for 2001 as a whole. But, unlike patterns that we’re starting to see in the computer/peripherals sector, there’s not yet clear evidence that the communications equipment sector is in the process of bottoming out.

Nevertheless, we do believe that market conditions will finally begin to stabilize — at a production level about 20% lower than a year earlier — by the middle of 2002. Excess inventory will still be a problem, but much of it will simply have to be written off, and production will shift to still-evolving new products. And improved export opportunities should begin to materialize as we move through this year.

But overall output gains during 2002-2003 should still only be in only the 2-5% range despite a lessening of the plethora of industry “negatives,” as the late ’90s momentum will be completely exhausted. Consequently, it’s likely that the communications equipment industry will plateau for a couple of years at a level of growth dramatically lower than the annual average recorded during the latter half of the 1990s.

Unit output from the nation’s electronic components industry group (dominated by semiconductors) declined for the ninth consecutive month during September 2001, as the industry’s worst period of retrenchment since the mid-1980s continued. Even during the last recession, 10 years ago, annualized gains in output from the electronic components industry averaged more than 12%. But we’re finally starting to see some encouraging signs of a bottom to this cyclical (but, thankfully and significantly, not structural) downturn, as inventories are finally being worked off (or, in resignation to technological obsolescence, reluctantly written off).

SIC 367 industrial production fell by 0.8% between August and September 2001, following a decline of 0.7% the month before. So where’s the good news? Well, monthly output losses for the first seven months of 2001 averaged 2.3%, including plunges of 3.5% in April and 3.4% during June. So the August/September output shrinkage was barely one-third the size of what the electronic components industry was having to absorb right into the second half of the year. Things may not truly be looking up, but at least the hole isn’t likely to get much deeper.

That’s small consolation in the short term, however, since production last September was at a level more than 16% lower than where it stood at year-end 2000, and 12.1% below the September 2000 level of output.

Electronics component industry production soared ahead by 48.5% during 1999 and then recorded a stratospheric growth rate of 74.2% in 2000. Although nobody truly believed that gains of this magnitude would continue, few predicted such a steep and sudden reversal of industry fortune. Nevertheless, a broader market perspective suggests that losses in industry output have actually been reasonably well-contained, given the dramatic plunge in average prices for semiconductor chips and other components during 2001. The dollar value of shipments (reflecting both the softening of unit demand and the price-dampening impact of excess global manufacturing capacity) had plunged more than 20% through the first three-quarters of this year, even as year-to-date production totals were running 10.6% ahead of the 2000 pace.

Electronic component production was 9.6% lower during the third quarter of 2001 than the same period a year ago, however. And we’re expecting that the over-the-year loss for the final quarter of 2001 will be about 15%. Consequently, we’re currently forecasting that growth will throttle back to an increase of something on the order of 3% for full-year 2001 (despite the current year-to-date pace of almost 11% growth) as surplus worldwide productive capacity meets up with an increasingly depressed level of business and consumer demand for electronic goods.

However, we’re growing a bit more hopeful about the medium-term growth prospects for the industry (the very positive long-term growth prospects have never been in question). Industry growth should begin to accelerate by the summer, as excess inventories are depleted or written off and the U.S. economy begins to get its “legs” again. Nevertheless, overall electronic components output during 2002 will probably still only grow by 5-10% — just a fraction of the average annual gains realized throughout the past decade.