Unit Volume Increases Promise Revenue Gains Ahead

Market sentiment about future sales prospects has brightened considerably, even though semiconductor shipments in June remained stuck for the 14th consecutive month at an annual pace of ~$220B. Sales have begun rising for custom and semi-custom parts, usually a reliable signal that end-market demand is strengthening.

Revenue was steady during the first 10 months, because the price rise in a capacity-short environment was offset by a volume decline in an inventory-surplus environment. Market dynamics reversed in the last four months. Now, price declines caused by surplus capacity are being offset by volume increases from inventory rebuilding and rising orders in a still-strong world economy. Seasonally adjusted prices fell 7% in June, but this was offset by a rise in unit volume to a record level.

Market dynamics will change again this summer. Volume increases will continue, although slower, and average selling prices will resume rising because investment restraint has sharply trimmed capacity growth. Semiconductor equipment sales again fell slightly in June, according to SEMI, with orders continuing to be below shipments. TSMC, a key industry bellweather supplier, reported that it expected the steep spring price cuts to be partly reversed in the summer.

Historical Data: World Semiconductor Trade Statistics (WSTS) Forecast: Reed Research Group

The expected sales increase will change the sales mix by application. Dollar sales to the computer and consumer markets have been steady at a high level in recent months. With both markets past their peak growth period in this expansion cycle, only modest increases in chip purchases are expected through 2006. Sales to the telecom market are off 10% in the last three months from the impact of both chip price and telecom manufacturer inventory reductions. Both negative factors will reverse in the summer, resulting in a large rise in chip sales to the telecom market.

Sales to the industrial market are off nearly 9% in the last quarter, even with a 10% jump in unit volume caused by the worldwide capital-spending boom. This market buys a lot of foundry-produced parts that have very volatile prices. The sales volume to the industrial market will keep expanding at the same pace into next year, with prices for chips used in the industrial market rising quickly later this year when surplus fab capacity is much lower. Only the auto market has increased semiconductor purchases in the last three months. The 4.4% gain reflects more electronic content in U.S., European and Japanese cars, and surging car sales in the developing world. These trends will continue, keeping chip sales to auto factories rising at about the same pace.