Analysts Expect Modest 2007
Staff -- Semiconductor International, 1/1/2007
Following this year's expected 20% increase in silicon shipments and 25% growth in semiconductor equipment sales, most analysts are expecting a less-than-stellar 2007. The fundamentals look good, but the consumer may be reining in spending, while fab capacity needs to be kept in check with demand. In addition to the forecasts here, check out what these analysts had to say when we brought them together for a roundtable discussion about what we can expect in the coming year.Moshe Handelsman
President
Advanced Forecasting
The semiconductor industry is now in its fifth straight year of continued growth, and the question on everyone's mind is, “When will it end?” Many thought the end had occurred in the second half of 2004, when annual seasonality lasted longer than normal, but IC revenues soon resumed their growth and have, at press time, reached a record level of $18.5B/month.
On the supply side, the technology shift from 200 to 300 mm contributed significantly to available capacity; however, this trend was balanced by the ultra cautiousness of decision makers who still remember the 2001 devastation. As a result, although fab capacity utilization was high, the IC industry as a whole has not reached scarcity conditions and, therefore, allocations and inflated margins were not present to fuel buildup of excessive capacity. The growth of IC revenues for 2006, ~9% based on the first 10 months, summarizes the situation. However, leadtimes in some market segments related to the PC market have reached high levels that are likely to cause a correction.
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We employ three tools for predicting 2007. The first is its IC Recovery Index, which alerts the industry when it has entered a recession period, reached the minimum point, and then returned to “normalcy.” This index is currently sufficiently high above its recession-alert point, indicating that the industry is safe for the time being from a devastating recession. However, as we enter 2007, the Recovery Index is expected to decline and reach the alert level.
The second, longer-term forecasting tool predicts the major turning points of underlying demand for ICs in revenues. It portends a decline for the second half of 2007. While it is not expected that this predicted decline will rival those of 2001, the industry will surely feel its impact as demand softens. However, if the industry overheats during the first half of 2007, the downturn will occur earlier and steeper than predicted. The third forecast, Underlying Demand for IC Units, indicates the growth rate of units in 2007 will be lower than in 2006.
As we predicted in last year's article, overheating was not expected for 2006, but the chance of it exists for 2007, especially as we approach a downward turning point in underlying demand in mid-2007. Both wafers and IC units are overheated, but because of the current softness of semiconductor equipment bookings, we anticipate that the aforementioned overheating will not transform into a major decline.
Richard Gordon
Managing Vice President, Semiconductors
Gartner Dataquest Research
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On the supply side, while semiconductor supply chain inventory has increased incrementally through 2006, we believe inventory levels remain under control and will stabilize in coming quarters because semiconductor vendors are sensitive of the need to manage output into the channel carefully. Inventory levels will be worked back down in 2007, although we will no doubt see the normal seasonal effect of inventory carryover from 4Q06 into 1Q07.
Capital spending increased by 15% in 2006 compared with 2005, with much of the spending (almost half) coming from the commodity memory sector. This heavy investment in DRAM and NAND flash has the potential to cause oversupply if demand side strength weakens, which is a concern for the industry and a significant forecast “wild card.” Outside of the memory space, however, capital spending is controlled, and capacity is increasing commensurate with demand as manufacturers invest strategically to strengthen their market position.
On the demand side, unit production forecasts for key equipment types, such as PCs and digital cellular handsets, while modest by historical standards, at least will continue to underpin semiconductor demand. It is in the consumer electronics space that the forecast unit demand for semiconductors is most healthy, especially in portable media players, games consoles and flat panel televisions, but here significant and sustained downward price pressure is a feature of the market that will temper revenue growth.
Therefore, our most likely forecast is for a modest 9% annual revenue growth in 2007, pushing the market to $283B.
Bill McClean
President
IC Insights
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Illustrating the strong underlying demand for ICs, and justifying our optimistic five-year outlook, 2006 marked the fifth year in a row of double-digit IC unit shipment gains. It should be noted that this was the only period since 1978 that registered more than three years in a row of 10% or greater IC unit shipment growth!
Analyzing 2007 using a top-down approach, all of the major countries and/or economic regions (i.e., United States, Japan, Europe, China, etc.) are expected to register slower GDP growth in 2007, as compared with 2006. We believe this economic “downshift” will cause electronic system sales to slow from 7% growth in 2006 to 5% in 2007. In turn, the worldwide semiconductor market is forecast to increase 7% this year, two points less than was registered in 2006.
Although the computer market is still by far the leading consumer of ICs, the electronic system type spurring the most significant amount of IC market growth over the next few years is expected to be cellular phones. We forecast that three billion cellular phone subscribers are expected to be in place by the end of 2007. This amazing figure would represent ~45% of the world's population of 6.6 billion this year!
In 2006, 985 million cellular handsets were sold, an increase of 22% over 2005! Moreover, it will take a handset shipment growth rate of only 1.5% to push worldwide cellular phone sales over the one billion unit level in 2007!
Although the 2007 semiconductor industry may encounter a couple of slow quarters, we believe that the semiconductor market, spurred by strong worldwide GDP and electronic system sales increases, will once again display healthy double-digit market growth in 2008.
Steve Szirom
President
InsideChips.com
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The bad news on housing and the economy continues to drift in, yet the stock markets have held up so far — perhaps because of a deep faith in the Federal Reserve to “make things right.” We believe that consumers will pull in the spending reigns in 2007, which will have a wide impact on the semiconductor business as well as the overall economy. With the new Democratic Congress in place, one of their stated goals is to reduce the deficit, thus creating a deflationary pressure on the economy. The Federal Reserve, which tries to manage the economy so it can keep inflation in check and continue to create growth (not deflation), may be facing a difficult situation. On one hand, the economy is slowing faster than anticipated and, on the other hand, the U.S. dollar is at two-year lows against the Euro. With or without inflation, the pressure on the Fed to raise interest rates to stabilize the dollar will play out in 2007, in our view.
The other risk that is looming ahead pertains to the rapid buildup of fabrication facilities in the chip industry since 2004. The value of new fab construction will hit a record high this year, and that means that by next year, wafer starts will also be at record levels. An estimated 35-40 fabs will start to be constructed and come online in 2007. About two-thirds of the new capacity coming online will be targeted for memory products. This area of the chip industry will be beset by declines in average selling prices (ASPs), driving down revenue numbers for the industry.
AMD and Intel will continue toslug it out on the microprocessor front. AMD will continue its bid to capture market share, and Intel will feel the pressure on prices as it battles to hold on to its market dominance.
With InsideChips' projections of a consumer spending slowdown and semiconductor companies expanding capacity at a much higher rate than dollar sales, we see a decline of 5% in the chip industry for 2007.
Gary Grandbois
Principal Analyst
iSuppli Corp.
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iSuppli expects the 2006 semiconductor revenue growth to come in at 9%, an increase over our previous forecasts, as a vastly improved DRAM market has been seen. Unlike the 6.2% revenue decline in 2005, DRAM revenues are expected to increase by more than 30% in 2006, as bit growth accelerates and price-per-bit erosion has eased. Without DRAM, the 2006 semiconductor growth would be a more modest 6.3%.
Although the red-hot DRAM revenue growth will not hold up in 2007, a double-digit DRAM growth will set the stage for an 11% semiconductor growth as the PC market returns to double-digit growth and the semiconductor market follows, assisted by firmer average selling prices (ASPs). Excess inventory will remain a problem into 2007, but will not have a major impact on this growth forecast.
Electronic equipment growth will be up slightly to 6.7% in 2007 because of the stronger PC market and continuing growth in handsets and consumer electronics, with the consumer market growth aided by the rollout of the new video game consoles. But 2007-2008 will represent the peak years of the “consumer-driven” electronics market, signaling the end of a decade-long growth trend as the broad consumer market settles into a more moderate growth pattern.
The semiconductor industry will cycle to a low growth year in 2009 as the equipment market slows to 4.5% growth and the consumer market hits a ceiling. This slowing equipment market will result in a decelerating semiconductor demand as capacity exceeds demand, resulting in a flat memory IC market, led by a 9% revenue decline in DRAM. Despite the expected slowing in 2009, the low point of the cycle will still remain positive with a 3.6% growth expected before an “uptick” is seen in 2010.
Dan Tracy
Senior Director, Industry Research & Statistics
SEMI
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Demand for semiconductors was very strong in 2006. As a result, silicon wafer and other material shipments experienced solid growth. It looks like silicon wafer shipments will have increased by ~20% from the previous year. Demand for semiconductor capital equipment also increased throughout the year, with 2006 being the second highest year on record at $41B for equipment spending.
With positive, though slower, growth expected in 2007 for the semiconductor industry, SEMI forecasts 4% growth in the equipment market, with global revenues reaching $42B. The semiconductor materials marketis forecasted to grow by ~8% to approach $39B.
Looking back over the past six years, one observation about the semiconductor industry stands out. For both semiconductor devices (and materials), revenues in 2004 surpassed the previous revenue peak reported in the 2000 boom year, and those revenues have continued to grow since 2004. For capital equipment, however, total revenues have yet to recover to the 2000 peak levels, and are only likely to do so in 2008 or 2009.
So while the semiconductor device market has grown to revenue levels above 2000, the equipment market remains smaller. Given the ramp and investment in 300 mm technology over the past several years, the equipment manufacturers have delivered technologies that have enabled greater levels of productivity for their customers. Yet at the same time, there are fewer customers, given the higher capital costs associated with building new fabs.
Coupling the market challenges experienced by the equipment manufacturers with the broader “cost-down” pressures facing the entire electronics industry, collaboration becomesincreasingly important in solving the technical challenges ahead. The industry will need to make decisions on where and how R&D dollars are to be spent so to better drive innovation. The electronics industry needs to realize that a stable supply chain is necessary to enable upstream companies to have the funds to innovate.
Jim Feldhan
President
Semico Research Corp.
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Risto Puhakka
President
VLSI Research
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The economy still looks tenuous. It is true that it is looking better than a few quarters ago, and that the positive indicators currently outnumber the negative ones. But the declining money supply is worrisome; M1 fell 5% in the third quarter, following two very weak quarters. As a result, we expect the U.S. economy to encounter a few rough quarters in early 2007. Plus, we still have the Christmas black hole clouding the outlook for next year.
Over the long term, we expect both equipment and chip sales to post high to middle single-digit sales growth. The industry is managing inventories, factory utilization and the profitability well. The major concerns are coming from the macro economic level and therefore limit the potential for classic industry cycles.
