Semi Shipments Falter in October, But Rising Trend Continues

Chipset supply shortages and a decline in the laptop share of PCs — together with generally weaker prices that lag the recent improvement in foundry capacity use — drove semiconductor shipments down 8% from September to October on a seasonally adjusted basis. All of these restraints will be gone early in 2006. Pricing will firm as foundry contracts are updated to incorporate the rise in production capacity use from 85% early in 2005 to >90% early in the fall. The shortage of Intel chipsets, especially for laptops, will ease with added supply from chipset specialists, followed by more Intel parts in the spring when chipset production moves to a new 300 mm process.

The disappointing October sales will be remembered only as a bump on the road during a sustained market expansion from late 2005 to well into 2006. Unit IC shipments dropped marginally in October, but remained 20% higher than at the beginning of the year and will continue to increase, although more slowly. This is assured by relatively balanced semiconductor inventories and the recent uptick in the pace of economic growth. The last GDP growth reports in North America, Europe and Japan were all higher than expected.

Also, the October decline was exaggerated by recent countercyclical currency trends. The U.S. dollar appreciated 3.4% against the yen and 1.4% against the euro in October, which raised the value of shipments expressed in U.S. dollars. The semiconductor market currently looks weaker when viewed from either Europe or Japan. While an appreciating dollar may persist into early 2006, the financial markets expect it to resume depreciating soon, perhaps as much as 4% in the next year after a 1-2% appreciation in 2005. It will inevitably weaken as interest rates steady in the United States.

The expected 9% annual semiconductor shipments gains in each of the next two years is the product of a 6% rise in IC unit shipments volume and a 3% increase in the average selling price of an IC. Expect actual developments to be more erratic but with the same average. This is a significant slowdown in volume gains from the 16% expansion in the year ended in October 2005 and the 17% rise in the previous 12 months. But it is consistent with the long-term cyclical pattern in the semiconductor market. Shipments increased at an average 9% annual pace in 2005-07, exactly the same as in the previous 15 years.

Several years of below-average expansion in semiconductor unit shipments suggests continued investment for production capacity expansion, but at a modest pace that manufacturers can accommodate without panic.