2006 Semi Market: Trying to Maintain Good, Steady Growth

The semiconductor industry has not seen the last of boom and bust cycles. The consumer will continue to drive revenue growth, and if all goes well in 2006, the industry should get away with single-digit semiconductor growth and double-digit growth in the equipment and materials segments for 2006. These are some of the conclusions from Semiconductor International's latest webcast , which rounded up today's leading analysts to give their forecasts and talk about the forces shaping the market.

Most analysts agreed that, as the overall electronics market shifts from relying on IT and corporate spending to relying on consumer spending, the market dynamics have changed. "We're seeing Oakley sunglasses with built-in MP3 players and Razr phones with Bluetooth headsets," said Jim Feldhan, president and founder of Semico Research Corp. (Phoenix). "The iPod has had dramatic growth, and it's being introduced with new form factors. Personal computers are booming, and developing countries are showing fast adoption of electronics." Jim McGregor, principal analyst at In-Stat (Scottsdale, Ariz.), added that new technologies like wireless pier-to-pier communications are growing in importance and driving the need for new consumer products.

But despite all this innovation and excitement, the margin on consumer products is slim. "With the consumer in control, in order to stimulate demand you have to keep pressure on pricing, which is likely to have the long-term effect of keeping growth rates in the single-digit region forever more," explained Richard Gordon, managing vice president of Gartner Research (Egham, UK).

The semiconductor market has traditionally grown at a 15-17% CAGR, so a permanent slowing to perhaps single-digit levels is cause for serious concern. But it may be one more sign of a maturing industry. "The industry is moving more toward an industrial tech manufacturing model, one that is run-rate oriented. We can see this in the tightness of capacity utilization and in the incremental side of capital spending," said Carl Johnson, president of Infrastructure (Carrollton, Texas). "There's a smashing together of the electronics boot chain all the way from the equipment supplier to the content provider, as companies figure out ways to get a share of the wallet out of the consumer or corporate hand."

So far, device manufacturers have accomplished what most refer to as a soft landing: a good balance of fab capacity utilization and chip inventories. "Because the decision makers have been more careful in adding capacity and building inventory, we predict that underlying demand for ICs will not peak until 2007, when we start to see a turning point in the market," said Moshe Handlesman, president of Advanced Forecasting (Wilmington, Del.).

But others are not as optimistic. "We've seen in the last few months that buyers are no longer being beaten up by their CFOs for having too much inventory; they are being beaten up by their sales VPs for not having enough product on their shelves," said Doug Andrey, director of finance and principal industry analyst for the Semiconductor Industry Association (SIA, San Jose). "So this cycle has been muted, but will people try to maximize sales after this one?"

"That is the question — people haven't been burned for 3-4 years, and we'll have to wait until September to see if they'll blow past the stop sign," said Jim Haughey, director of economics at Reed Business Information (New York).

Just how muted has capital spending become? A lot will depend on control over capital spending. Soon after the webcast, Bill McClean, president of IC Insights (Scottsdale, Ariz.), released a chart that maps changes in capital spending (Figure ). 2000-2001 experienced the most dramatic change, from an 85% increase in spending to a 38% drop. In 2003-2005, the industry attained a much more comfortable soft landing.

2003-2005’s ‘soft landing.’ If the industry achieves 5% increase in capital spending from 2005 to 2006, it will be the best increase of two years following a peak year of all the cycles shown. (Source: IC Insights)

But Feldhan contends that we will still see fairly steep cycles. "Even though we're seeing more conservative investment, the new fabs are 300 mm, which pump out more silicon, and when you marry that with larger consumer demand, which have shorter lifecycles, I think we'll see periods of double-digit growth and will continue to see fairly steep down cycles as well."

View the archive of SI's 2006 Semiconductor Industry Forecast on demand.