2007: Short and Shallow Slowdown

The market will experience a slowdown in the first quarter of 2007, as supply engendered by capacity expansion this year begins to flood the market. An increase in capital expenditures of 20+% this year will result in new equipment being put into production in the second half of 2006 and in 2007. Semico forecasts that it will take two to three quarters to utilize the additional capacity. As a result, capacity utilization is expected to fall starting in the fourth quarter of 2006, continuing in the first half of 2007 before increasing again later in 2007. This will then serve to stabilize prices once again.

Semico's Inflection Point Indicator (IPI) declined for two straight months before stabilizing in June. With its forward-looking view of the market, this points to January and February 2007 as the next slowdown. The IPI rose slightly in June to 15.4, an increase of 0.4%, and another 2.8% in July to 15.8. In the most recent IPI, August rose to 16.1, indicating that the second quarter will have a modest improvement over the first quarter of 2007. The recent recovery in the IPI suggests the slowdown is expected to be shallow and short in duration. As a result, Semico is forecasting growth of 7.1% for the total semiconductor industry next year, down from the 11% in 2006.

While capacity utilization, end markets, mix changes, etc. affect the cycles of the semiconductor market, the economy also contributes to overall demand. Declining oil prices are encouraging for the economy in the fourth quarter. The housing market is cooling, and the Middle East conflict and North Korea continues to fuel uncertainty. All these factors contribute to consumer concerns. U.S. consumer sentiment increased in September to 85.4, the lowest of the year. Home buying attitudes have shown little overall change since July, remaining at the lowest level recorded since 1990.

The inflection Point Indicator rose to 16.1 in August, indicating that 2Q07 will improve modestly over 1Q07.

But fortunately, there are also positives that help to balance out the negative factors in the market. There are a growing number of consumer end markets, and adoption rates are faster. Wages rose at an annual rate of 4.9% in the second quarter, which helped consumers continue spending despite high energy costs and higher interest rates. The nation's unemployment rate dropped to 4.7%.

With these positive aspects, Semico forecasts semiconductor market growth this year will be 11.6%, reaching $254B, and 2007 will show an increase of 7.1%.

ASPs have been schizophrenic this year. After a drastic drop in the aggregate ASP in April, spirits soared as the ASPs headed up in May and June. April's ASP was $0.410; it rose to $0.466 in May and $0.480 in June. Unfortunately, the trend reversed in July, with aggregate ASPs dipping 12.1% to $0.423 and Augusts' ASP surged to $0.478 driven by strength in DRAMs.

So what applications are driving the growth in 2006 and 2007?

On the computing side, notebooks will actually increase in 2007, as new architecture will spur growth. Expect desktop to only experience low single-digit growth.