Stalled Chip Market Set to Revive

Monthly semiconductor sales remain stuck at ~$18B after seasonal adjustment, 5% below the peak level reached last June. Overall, a modest sales expansion is expected in the spring and summer with quicker growth returning late in 2005, pushing annual sales up 12% from last year. This is the sum of sales to all end markets, each of which is driven partially by different market forces. The market average is significant for equipment and materials suppliers, but it masks huge variations in sales trends in individual end markets and, in turn, types of semiconductors.

The stalled sales are not caused by weaker growth in the world economy or lower purchases of end products containing semiconductors. Both slowed slightly late in 2004, but have continued to expand at an above average pace. Rather, the market stall is because of the overbuying of semiconductors a year earlier in all end markets, especially telecom and consumer electronics. Some of the excess purchases were spurred by shortage concerns. Some were to restock depleted supply pipelines. And some were made by Asian assemblers attempting — not all successfully — to enter end product markets.

The inevitable consequence of overbuying is a period of working off surplus inventory. The market is nearing the end of that process, although inventory surpluses remained early in 2005 for several parts heavily used in cell phones and consumer electronics, including display drivers, amplifiers and voltage regulators. Other semiconductor end markets have largely escaped this inventory cycle.

Sales of parts mostly used in the computer market, such as MPUs, DRAMs, and application-specific linear and digital parts, have expanded strongly since mid-2004; sales were 21% higher in November than May. This market may be becoming overheated with a risk of an inventory cycle and weaker pricing later in 2005, as the surge of replacement PC purchases subsides.

Over the same period, sales of application-specific parts and microprocessors to the auto industry declined 5%. Slower than expected auto sales growth in Asia contributed to this modest inventory cycle that will end this winter. Then, the 2% rise in worldwide vehicle sales this year will again set the sales trend.

Semiconductor sales to the consumer electronics market have been volatile but essentially unchanged since mid-2004. While end product sales growth remains strong, especially for MP3s and HDTVs, it has been offset so far by the need to reduce excess inventory of parts.

Semiconductor sales to telecom end markets increased 18% in the second half of 2004, and semiconductor sales to telecom product manufacturers will strengthen progressively as the surplus ebbs. •