SIA Predicts Continued Growth Through 2009

Aaron Hand, Managing Editor -- Semiconductor International, 11/16/2006

The Semiconductor Industry Association (SIA) released its annual forecast of global semiconductor sales, predicting final 2006 sales of $249B, and a 10% growth over that for 2007. In the webcast presentation, produced by Semiconductor International, SIA president George Scalise noted continued strong growth through the coming years. “We are in a very strong demand period, we have excellent inventory control, we have capacity well in balance, and I think we can look forward to a very good period over the next three to four years,” he said. After reaching the $300B mark in 2008, growth is expected to slow down some in 2009 – to 5.8%. Nonetheless, SIA expects a 9.2% compound annual growth rate (CAGR) for the 2006-2009 forecast period, Scalise added.

Among the major semiconductor lines, MOS logic continues to be the largest product sector – driven by digital consumer, wireless and programmable products – and will see an 8% CAGR through 2009. DRAM will be the fastest growing product, expected to grow at a ~14% rate over the forecast period.

For the first time in its forecast, SIA has split NAND and NOR flash into their own categories because they are both becoming so large, with NAND in particular growing quickly at 11%. NAND flash is replacing hard drives in many consumer products, such as MP3 players, Scalise noted. “Hybrid NAND and hybrid NAND drives are now making their appearance in laptops, and pure NAND drives could be as much as 25% of the laptop market by 2009,” he said. By next year, close to 90% of MP3 players will be using flash drives.

In fact, MP3 players, along with other consumer electronics and cell phones, have become major demand drivers – in part because of their growing popularity, but also because of the considerably higher semiconductor content in 3G cell phones and MP3 players than in older-generation products. To help the situation, the Consumer Electronics Association recently forecast that holiday spending this year will be very strong – up 15% over last year. “And last year was good, with a 12% growth,” Scalise added.

Scalise called the growth in the cell phone market “remarkable,” with handset sales up ~20% this year. “And with the semiconductor content on average of ~$41, [cell phones] represent a $1B market for semiconductors,” he said.

In 2007, cell phone and consumer purchases will continue to be the driving force for demand. “And by 2010, the Consumer Electronics Association estimates that 89% of U.S. households will own at least one cell phone; 80% will have at least one digital camera; and >50% will have at least one MP3 player,” Scalise said. “So we can see that these consumer products are becoming very, very pervasive very quickly.”

Inventory and capacity utilization

Addressing the industry inventory situation, Scalise referred to numbers from iSuppli, which reported excess inventory in the supply chain of ~$3.9B at the end of 3Q06. “Most of that excess inventory appears to be in the PC sector. And some of that is beginning to work its way out of the system,” Scalise said. “However, even at this level, which represents ~1.5% of the total annual demand, we think that, with the solidly growing market that we have, this does not constitute a major industry-wide issue.”

Overall capacity utilization increased to ~91% in 2Q06, and VLSI Research expects utilization rates to rise to 95% in the second half of this year, Scalise said. “I think it’s very clear that utilization rates are very high, which bode well for cost structures being well in line.”

Worldwide, capital spending in 2006 is forecast to increase to $57.3B, according to Morgan Stanley. “This represents ~23% of revenues, which is well in line with what we’d like to have that would represent an equilibrium between supply and demand, which is somewhere in the 20-22% range,” Scalise said. Asia-Pacific companies will account for ~46% of the total capital equipment expenditures, he added.

Bipartisan initiatives

Scalise also spent some time talking about the effects of the recent congress elections in the United States, the results of which shifted the balance of power over to the Democrats. He primarily outlined the key issues that both Republicans and Democrats stand ready to address, and called for bipartisan action on that legislation to “keep America a leader in innovation.” Those issues include funding from the federal government for basic research, education and R&D credits. “Funding of the physical sciences at our universities has been lacking in years past,” Scalise said. “Both Republicans and Democrats agree that the federal government has a responsibility to increase this funding.”

Improvements in education will also be critical to generate the talent base that is necessary, Scalise said. Because this will take time, he called for changes to enable the country to attract and keep talent from around the world. “That means we have to have visa policies that are going to allow these young people to come here and study, and also visa policies that will allow them to get their green card, get their permanent residency, and stay here and live and work once they graduate,” he said, noting that the cap for H-1B visas was reached for the 2007 year in the middle of 2006.