Electronics Industry Update

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

Semiconductors

According to preliminary data released by the Semiconductor Industry Association (SIA), the value of worldwide chip sales increased by 7.2% between February and March to a level of $10.75B. This followed three consecutive months of no net gain in chip sales, so March’s increase was an encouraging sign that the market isn’t just bottoming out -- it’s actually in a (mild) recovery phase.

But the over-the-year trend remains ugly -- although it has grown marginally less so during the past six months. March 2002 global chip sales were estimated to be worth 25.4% less than during the same month of 2001. Not that things haven’t improved: This past September, worldwide chip sales were trailing the year-earlier total by 44.4%, so the March 2002 vs. March 2001 comparison shows some considerable improvement in trend over the dismal late-2001 state of the industry. But the still-considerable distress of the sector is apparent when semiconductor sales are viewed in a broader historical perspective: At the end of 2000, sales on a three-month-average basis were still growing at an annualized rate of almost 22%, but Q1/2002 sales were still declining at a 33.8% annualized rate.

Between February and March of this year, semiconductor sales values rose in all four broad regions of the world for which the SIA summarizes data. But in three of the four regions, sales levels this March came up shy of the March 2001 total -- although the Asia-Pacific region was clearly on the comeback trail.

Following are the February-March semiconductor sales trends by major geographic region (with the 7.2% increase over-the-month average trend in global sales value being the relevant point of comparison):

• The Americas: +3.6%
• Europe: +7.7%
• Japan: +5.7%
• Asia-Pacific (excluding Japan): +10.4%

The dollar value of chip sales to the Americas this March was 36.5% below its March 2001 level -- a much steeper contraction than the 5.4% over-the-year decrease in worldwide sales. SIA totals for full-year 2001 show that chip sales to the region trailed the 2000 total by 44.2% (vs. the 32.0% global decline).

Sales to Europe during March 2002 were valued at a level 31.1% below the March 2001 total. And the cumulative numbers for all 12 months of 2001 showed that dollar-valued sales to the region were down 28.6% from the total for full-year 2000 -- a decline not nearly as severe as that experienced in the Americas.

After recording much stronger growth than in other parts of the world through the first half of 2001, Japan saw chip sales to the country plunge during the final months of last year even as the market began to bottom out throughout the rest of the world. And this steep decline only accelerated as we moved into the early months of 2002. The estimated dollar-value of sales to Japan was 41.9% lower this March than during March 2001. Through the 12 months of 2001, dollar sales to the country were estimated to be worth 29.1% less than during 2000. But sales during the first quarter of 2002 were 46.1% lower than during the first three months of 2001, so Japan can hardly be characterized as one of the globe’s “hot” markets for semiconductors during the first half of this year.

March 2002 chip sales to the Asia-Pacific market (all nations of the region, save Japan) were valued at a level 9.9% above their March 2001 total. Totals for full-year 2001 showed chip sales to Asia-Pacific nations coming up 22.3% short of cumulative sales volume for the 12 months of 2000. This was a smaller decline than that recorded by the Americas, Europe or Japan. But it nevertheless represented a significant deterioration in market conditions following growth of about 38% between 1999 and 2000.

"Bottom Line"

The March report from the SIA on the health of the semiconductor industry was mildly encouraging, in that it showed global sales on the mend after three straight months of no growth. At the same time, there wasn’t much in the report to suggest that the industry will gain any considerable momentum in the months immediately ahead. Prices have stopped falling -- and, in the case of DRAM chips, actually started rising significantly above the cyclical lows -- but worldwide demand on a unit basis remains discouragingly weak.

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 down again -- but by a much smaller magnitude than between 2000 and 2001. And 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 more than 15% 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.]

End-Market Demand

Estimates from the Federal Reserve Board’s monthly industrial production survey show that computer/peripherals industry output rose for the seventh month in a row during April. Production increased by a solid 1.6% between March and April, following cumulative gains of 12.8% over the prior six months. And the production indexes for the first three months of this year were all revised sharply upwards from those that were originally published. Consequently, first-quarter 2002 industry output is now estimated to have been 2.7% stronger than what was estimated in the preliminary numbers.

Cumulative output from the computer/peripheral equipment industry 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. But April 2002 industry production was again 7.2% higher than during the same month a year earlier -- after a period of eight straight months (July 2001-February 2002) when production levels fell below the totals of one year earlier.

Although the industry’s production total during the first third of this year trailed the January-April 2001 level by 0.3%, this was considerably less negative than the 8.2% output decline recorded between the final quarter of 2000 and the last three months of 2001. And the manufacturing capacity utilization rate in the industry moved up strongly from 62.8% during the final quarter of 2001 to 68.0% during April 2002.

We should continue to see solid month-to-month gains in computer/peripherals output throughout this year. Nevertheless, its likely that overall industry production during the second quarter of 2002 will end up -- at best -- only about 4% ahead of the reasonably healthy total recorded during April-June of last year. However, growth should gradually accelerate as we move through the second half of 2002, and there’s every reason to expect that annualized output gains will be back in solid double-digit territory by this time next year.

We’re currently forecasting modest 5.5% growth in industry output for full-year 2002, followed by a 13.3% gain next year. Not bad -- especially in light of last year’s even-more-marginal increase -- but still a far cry from the 30%-plus growth in computer/peripherals output recorded during both 1999 and 2000.

Output from the nation’s communications equipment industry resumed its downward slide during April following two consecutive months of encouraging increase. Production among communications equipment manufacturers fell 1.6% between March and April, following a revised gain of 1.3% the month before. Prior to the (apparently temporary) upturn in communications equipment output during February and March of this year, industry production had fallen in every single month since October of 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. And the production index for the industry during the first third of this year averaged 23.6% less than during the first four months of 2001. Furthermore, the industry’s manufacturing capacity utilization rate was at a record-low level of 54.3% during April 2002 -- dramatically lower than the first-quarter-2001 average of 75.5%.

Communications equipment production will finally hit bottom sometime during the first half of this year. Although actual quarterly production totals for the first three quarters of 2002 will almost certainly still fall well short of the comparable levels for 2001, we should begin to once again see some halting improvement in the month-to-month trends. And it’s even possible that the industry could finally begin to record some consistent 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 almost 2% higher than over 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. Following output contraction of another 10% or so in 2002, our preliminary forecasts call for production to increase at about that same rate during 2003.