Semico Forecasts Meager 2007

We are forecasting the first quarter of 2007 to be down compared with the fourth quarter of 2006. That is not unusual given the normal seasonal patterns; however, recent industry data shows that the first quarter of 2007 will be weaker than expected. Actual sales to date indicate that first-quarter world semiconductor revenues will be down by more than 7% compared with the fourth quarter of 2006.

A sharp drop in average selling prices (ASPs), particularly for memory, is the major contributing factor to the weakness in the first half of this year. The excess inventory buildup in NAND flash is affecting ASPs. In some high-volume densities, NAND prices have dropped in excess of 30% in the first quarter of 2007. Additionally, there was an excess level of inventory, especially in the wireless markets. Last year, Tier 2 cell phone manufacturers built up inventories with the expectation of gaining market share from leading suppliers. Because of desirable cell phone designs from the Tier 1 manufacturers, this strategy did not work. The result is significant cell phone inventory in Asia, which needs to be burned off in the first half of 2007. The inventory problem will be resolved during the second quarter of 2007, setting the stage for a market recovery in the third and fourth quarters of 2007. However, this recovery will be too little too late for 2007.

In addition to specific semiconductor industry variables, we consider the worldwide situation. The economy, both in the United States and other regions of the world, could put a damper on semiconductor demand this year. While GDP is up in a number of regions, the rate of growth is forecast to be more moderate in 2007. As an example, U.S. GDP is expected to increase 2.7% in 2007, compared with a 3.6% increase in 2006.

Other economic concerns in the United States include a slowing housing market as inventories remain high and prices are soft. The U.S. Federal Reserve's decision to hold rates steady is good for the real estate market; however, if inflation rears it head, they left the door open to raise rates later this year. The central bank in Europe has already raised rates, citing inflation concerns.

As the world GDP slows, the manufacturing sector is lowering its business investment as companies restructure for profitability. Autos, machinery and steel are examples of sectors that are indicating lower capital investment.

Consumer spending is somewhat weaker, but holding up well against other economic forces. The consumer remains enamored with electronic gadgets, and continues to spend. There is a downside risk to consumer spending, which will be triggered if housing prices decline significantly in 2007. Consumers are still willing to spend, but are demanding higher quality at lower prices.

The situation in the Middle East continues to fuel uncertainty. This uncertainty, added to the growing oil consumption from China and India, will push oil prices even higher. These higher prices will, in turn, have a dampening effect on the overall economy.

Global competition is a fact of life these days. World competition produces the lowest cost to the consumer but also tends to hold down corporate profits, straining the ability to invest.

Growth in end-use markets will counter the impact of the slower economy on semiconductor demand. There will be continued strong demand for communications and portable computing devices. Cell phones are adding computer-like functions, handheld devices are being designed with wireless connectivity, and high-end cell phones and notebooks are converging.

New innovations, such as high-definition screens, Blu-ray, HD DVD, flash-based camcorders, and full-featured pocket-sized mobile PCs, are just a few of the products on the horizon that will help drive semiconductor demand. There continues to be a great deal of buzz around a number of new products. Apple's iPhone is one example and Sharp's 108 in. LCD is another. At the other end of the spectrum, tiny screens are also being touted, as manufacturers announce cell phones that allow users to watch TV simulcasts. SanDisk's Wi-Fi enabled portable music players will be well-matched against the Apple iPod. And the digital home continues to evolve, as a number of companies continue to roll out media centers, set top boxes, and media receivers to address the networking of TVs, computers, MP3 players and other digital consumer devices.

Overall, we forecast total worldwide semiconductor revenue shipments to be meager in 2007, reaching $252.2B, a 1.8% increase over 2006.