It's a Larger Semiconductor Market, but Is It Any Smarter?

Over the last 18 months the semiconductor industry experienced another roller coaster ride as demand outpaced capacity, causing double bookings and raising average selling prices. So are we destined to overbuild capacity, overstock inventory, and suffer a corresponding downward cycle that has been so characteristic of the semiconductor industry?

A slowdown is inevitable as the growth experienced in 2010 is clearly unsustainable in the long term. The cycles of the semiconductor industry over the past decade, combined with the escalating costs and risks associated with manufacturing facilities, design complexities, and even assembly and test investments, have created a conservative environment that is quite different from the unabashed exuberance that characterized the semiconductor industry of previous decades.

Semico Research Corp. 's Inflection Point Indicator (IPI) has been pointing to a negative revenue growth rate for fourth quarter 2010. We’re already seeing indications throughout the supply chain that manufacturers, distributors, and ODMs are gently tapping on the brakes. Some of the large foundries have been slowing new equipment deliveries in anticipation of more moderate future orders. The distribution network has already started reducing inventories in anticipation of the slowdown Semico forecasted nearly 12 months ago.

This is actually good news for the overall industry. If inventories are drawn down and capacity expansion slows, the prospect for a dramatic drop in semiconductor revenues is greatly reduced. These actions by industry players will help the industry leave 2010 without large excess inventories and a manufacturing sector that is positioned to maintain relatively high capacity utilization rates in 2011.

This will, in turn, maintain average selling price stability, as unit growth will be consistent with end-market growth rates. Semico continues to see expanding unit demand for portable products and the corresponding infrastructure support. Products such as netbooks, tablet PCs, notebooks, smart phones, HDTVs, enterprise storage, enterprise servers, 3G and 4G infrastructure buildout, and a multitude of emerging consumer-connected devices will continue on a growth path through 2011.

The cautious outlook started in August and supports Semico's projected 9.5 percent growth for semiconductor revenues in 2011. Are industry players smarter? Maybe they are just more wary, but there are no reasons that this industry will be stagnant in 2011.