2005 Shipments Outlook Weakens – But By How Much?

The outlook for semiconductor shipments through 2005 weakened in the most recently published market forecasts. These forecast downgrades were prompted by the five-month stall in the value of shipments in the spring and summer at an $18B seasonally adjusted monthly total. Shipments forecast for next year now range from a 5% decline to a 20% plus increase, an unusually wide divergence this close to the beginning of the year, even for this volatile market.

This sales stall is consistent with a worldwide slowdown in spending growth during the same period caused by the end of tax cuts in the United States, deliberate reductions in investment and consumer borrowing in China, and the worldwide diversion of spending power to fuel and oil products. Semiconductor purchases have also been reduced recently by the need to absorb surplus components bought earlier in the year by overeager PC and cellular handset assemblers in Asia.

Each of these restraints is now ebbing, so unit-volume shipments will be rising again late in 2004 and in 2005, but the impact of the stall in sales will be longer lasting on average selling prices (ASPs). Capacity continued to expand during the stall in sales, so suppliers will not be able to get the "shortage premiums" in their prices through the winter that appeared likely a few months ago.

There are two major differences between the pessimistic and optimistic semiconductor forecasts. The pessimist assumes that the mid-year stall in sales extends until late 2004 before component inventories are balanced and chip purchases rise. Enough reserve fab capacity is needed to preclude the usual end-of-cycle surge in ASPs. The optimistic forecasts assume that the summer inventory bubble is a bump in the road to further market expansion, and that renewed strong growth in unit-volume shipments quickly strains fab capacity and pushes up prices.

Next winter will determine which forecast assumptions were correct. Right now, there is reason to be optimistic. Excepting electronics, economic reports from around the world for August and September show a rebound in spending. This includes the United States and China, where earlier spending weakness originated. The economic environment is consistent with a sizable gain in 2005 semiconductor sales. U.S. consumer durable goods spending will rise 5-6% in Q3 after 1.4% gain in the spring. U.S. equipment invested is poised to post another double-digit rise in Q3. Fab capacity utilization and the resulting ASPs a few months ahead are still unknown. But there has never been a market expansion that did not end with a surge in prices.