Electronics Industry Update

Staff -- Semiconductor International, 5/1/2002

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

Worldwide chip sales this January were worth nearly 40% less than a year ago, but sales to the Asia-Pacific market eked out a gain over the month.

According to preliminary data released by the Semiconductor Industry Association (SIA), the value of January chip sales fell 1.7% below the year-end 2001 level -- the second straight month of decline following solid gains recorded during October and November 2001.

January global chip sales were estimated at 39.8% below the same month last year. Average dollar volume this past December was 43.1% below its year-ago level; at the end of 2000, sales on a three-month-average basis were growing at an annualized rate of ~22%. Therefore, this January’s trend is a sign of some slight improvement over the dismal year-end 2001 picture, but still shows the considerable distress of the industry when viewed in a broader historical perspective.

The estimated total dollar value of worldwide semiconductor sales during 2001 was $139B, 32% below the record-high $204.4B in sales recorded in 2000. Unit sales of chips also fell sharply last year, declining an estimated 21.3% from 2000’s total of 373.4 billion semiconductors.

Thus, although it’s clear that lower average prices have been an important contributing factor to the unprecedented depth of the market’s decline, weakening end-market demand for unit shipments was responsible for two-thirds of the industry’s downturn during 2001. However, with the release of this January’s data, the SIA made special note of the encouraging and continuing rise in average DRAM chip prices. And with semiconductor inventory levels at end-market users now much lower than they were even six months ago, demand also looks poised for a rebound by the spring or early summer of this year.

Semiconductor sales values dropped in three of the four broad regions of the world for which the SIA summarizes data -- the exception being the Asia-Pacific market (excluding Japan) -- between December 2001 and January of this year. January sales levels declined in all regions compared with the January 2001 total.

The most encouraging trend noted by the SIA in an otherwise disappointing January sales report was solid growth in microprocessor chip sales, indicating some building momentum in the long-moribund PC end market. In addition, the association highlighted the continued move on the part of global semiconductor companies to outsource a larger share of work to contract manufacturers located in the Asia-Pacific region. This has greatly improved the monthly and over-the-year trends in chip sales to this region, even as global volume continues to stagnate.

Last year’s estimated 32% decline in global sales volume represented the sharpest annual contraction in the 50-year history of the semiconductor industry. And the decline in unit sales showed that the problem was more one of weak aggregate demand than of industry overcapacity and low average prices -- although the inventory glut did play an important role in aggravating the situation.

Encouragingly, we’re still expecting for most of the considerable inventory overhang to be worked through or written off by the middle of this year, leading to gradual market recovery. For 2002 as a whole, global chip sales are likely to be little changed from the 2001 total -- up or down a couple of percentage points, depending upon how quickly average prices recover. But during 2003 we’re expecting to see solid growth in the market on the order of 25-30% -- although this solid recovery would still leave 2003’s dollar value of semiconductor chip sales about 10% below the enviously robust $204.4B level achieved during 2000.

(NOTE: This trend analysis of SIA sales figures is based upon a three-month-moving-total view of the data -- widely considered to be the most accurate and meaningful way to look at the information because it smoothes out the always erratic movements in intra-quarter sales volume.)

Estimates from the Federal Reserve Board’s monthly industrial production survey show that computer/peripherals industry output rose for the fifth month in a row during February. Production increased by a solid 1.5% between January and February, following cumulative gains of 6% over the prior four months.

Cumulative output from SIC 357 during full-year 2001 was estimated to have increased by only 2.3% from total industry production throughout 2000. This followed gains of 30-35% recorded in both 1999 and 2000. February industry production was 3.3% lower than the same month a year earlier.

Still, there’s plenty of encouraging evidence that this market has turned the corner. After declining at a 15.5% annualized rate during the middle two quarters of last year, the computer industry output eked out a 3.6% gain (seasonally adjusted) during the final quarter of 2001. Add to that the strong gains recorded during the first two months of this year, and it’s clear that the computer/peripherals market is slowly regaining momentum. And the manufacturing capacity utilization rate in the industry moved up from 62% in October 2001 to 64.5% during February.

We should continue to see small month-to-month gains in output throughout the first half of this year. But there’s no question that computer and peripherals production during the first quarter of 2002 will still come up short of the reasonably healthy total recorded during the first three months of 2001. However, growth should gradually accelerate as we move through the year, and there’s a good chance that annualized output gains will be back in solid double-digit territory by this time next year.

We’re currently forecasting 6.6% growth in industry output during 2002, followed by a 15% gain next year. Not bad -- especially in light of last year’s marginal increase -- but still a far cry from the 30%-plus growth recorded during both 1999 and 2000.

Output from the nation’s communications equipment industry is estimated to have eked out a gain of 0.1% between January and February of this year. Prior to this (very tentative) sign of stabilization in communications equipment output, industry production had fallen every single month since October 2000.

Following output growth of 15.4% in 1999 and 27.5% during 2000, total unit production from U.S. communications equipment manufacturers during full-year 2001 was 10.2% less than the year before. The production index for the industry during the second month of the new year was 23.9% lower than February 2001. And the industry’s manufacturing capacity utilization rate was an abysmally low 55% this February -- dramatically lower than the first-quarter 2001 average of 75.5%.

Communications equipment production is likely to finally hit bottom sometime during the first half of this year. Although actual quarterly production totals for the first two quarters of 2002 will almost certainly still fall well short of the comparable levels for 2001, average monthly losses should be of a smaller magnitude than over the past six months. And it’s even possible that the industry could finally begin to record some marginal gains in output by the fall of this year.

Consequently, we’re cautiously optimistic that market conditions will finally stabilize by the middle of this year, and that overall industry output during the second half of 2002 will be about 6% higher than the final six months of 2001. However, this still wouldn’t be nearly enough of a rebound to help the industry avoid its second straight year of production declines.