IC Prices Set to Rise for Several Years

The average selling price (ASP) of an IC has been rising slowly for a year, trailing the increases in unit volume, but will now increase more quickly for several years as surplus capacity continues to shrink in a maturing worldwide economic expansion. Fab capacity utilization hit 93.4% in the first quarter, according to SIA (99% for sub-0.16 µm lines), and is certainly higher now in the summer. Fabs can operate for an extended period at more than 100% of nominal capacity, so few serious delivery delay problems are expected. But price pressures will strengthen. Only 0.4% more wafer start capacity was added from October to March. The easy restart or refurbish capacity additions were made earlier. Now much of the added capacity has to be expensive new buildings or new lines. It is on the way, but manufacturers will be slower to make this type of commitment. The price cycle has become less volatile and the unit volume cycle more volatile over the past decade.

The ASP of an IC in the WSTS shipments report hit a 27-month high in March, rising 8.1% in the last 12 months. Prices are expected to rise ~3% by next March and as much as 8-10% over the next year. Even then, the ASP will be <10% below the price peak reached in 2000. That ASP may never be reached again, given the decline in IC prices from cycle to cycle from cost reductions and because the 2000 price peak was exaggerated by the telecom and Internet bubbles.

Higher unit volumes account for almost all of the 60% semiconductor shipments revenue gains in the past two years. Ahead, high ASP will account for 35-40% of the forecasted 38% further rise in shipment revenue through the first quarter of 2006, and all of the gain in late 2005 and early 2006.

Rising prices always cause a loss of sales to industries with alternative technologies. But there is no risk of market share loss by the semiconductor industry because the ASP overstates the cost to semiconductor buyers. A more accurate buyers' cost is the quality adjusted price index for digital MOS ICs calculated by the U.S. Bureau of Labor Statistics. This index uses lab test results to subtract performance improvements for microprocessors from higher prices when new parts replace older parts, and assumes that higher prices for all other replacement parts are offset by quality improvements.

This price index shows prices dropping 7.5% per year for the past five years, while the ASP declined only 4% a year. The 3.5% gap is almost entirely due to microprocessor improvements. Similar adjustments for other parts would substantially widen the gap.