Stop Agonizing: 2011 Will Be a Strong Year

The November World Semiconductor Trade Statistics results were distorted by a billion-dollar downgrade/restatement to the year-to-date numbers. These things do happen from time to time, but one of this size is quite rare. The overall impact was to reduce the year-to-date market by around half a percent; not so bad per se , but, due to its leverage, it reduced the overall year-on-year market growth by a couple of percentage points.

As a result, we at Future Horizons have downgraded our 2010 forecast to — a still very reasonable — 30 percent. This falls into the category of “tweaking the final number,” though it is not a change to our underlying forecast sentiment or outlook. What concerns us more is the industry perception that moving from a 30 percent growth year to single digits in 2011 heralds yet another classic chip market boom turned to bust. It does not; it is simply a quirk of the math. 2011 will be a very strong year.

Re-statements aside, what is the outlook for 2011? First, let's look at our four horsemen of the semiconductor apocalypse:

  • World economy
  • grew 4.8 percent in 2010, according to the International Monetary Fund and is forecast to grow 4.2 percent in 2011.

  • Capacity
  • effectively sold out, with capital expenditure now flat and the book-to-bill below parity.

  • Average selling prices
  • have been increasing now since the second quarter of 2009 or six quarters in a row.

  • IC units shipments
  • are in a “steady as you go” mode with no excess inventory and no excess capacity to build any.

In short, whereas this time last year the problem was getting any orders, the problem today is getting semiconductor product. The chip market fundamentals really do not get any better than this, yet industry pessimism is at its highest since the {complink 6935|Lehman Brothers} collapse, simply because few CEOs and even fewer CFOs seem capable or willing to look beyond their profits-and-loss spreadsheets.

This problem is exacerbated by the fact that all market research numbers should carry a skull-and-cross-bones health warning:

Numbers can be very dangerous for our health. Misinterpret, worse still,
misrepresent the numbers, and you will put the long-term health
of your company at risk.

We experienced a very clear example of this last year when CEO after CEO trotted out the same lame excuse that they “missed their third-quarter numbers because the market rebounded faster then they (or their customers) had forecast.” We had been saying publicly and vocally since January 2010 — a full nine months earlier — that the rebound was inevitable if you looked at the data beyond the immediate face value of the numbers.

So the real problem was that few people believed. This is the chip market equivalent of the bad worker blaming his tools. Clearly the Lehman Brothers collapse and the smoke and mirrors, sleight of hand, “legal” but clearly deceitful shenanigans that the world’s best and brightest financiers had dreamt up in the clear interests of lining their own pockets first and damn the consequences second was a huge blow to industry’s collective confidence. The recovery process, both emotionally and practically, has been slow, but CEOs are paid to make judgment calls, and that necessarily involves an element of risk. Risk avoidance is not risk management — it is simply a copout.

Entering 2011 we thus see the industry fundamentals in especially good shape, a fact that can clearly be seen if you redraw the graphs to take out the “data crash” caused by the Lehman Brothers collapse. Here are the growth drivers:

  • Continuing capex famine, despite 2010’s 140 percent capex spending growth
  • Falling capex book-to-bill (since August 2010), now less than 1
  • Six successive quarters of flat industry capacity, cruising well below excess capacity threshold levels
  • Supply chain mismanagement: no trust, no confidence, and no commitment
  • Shortages everywhere from substrates (e.g., 200mm wafers), equipment (try buying an immersion stepper or single-wafer epi reactor), to lead frames (especially given the desire to move from gold- to copper-based packaging)
  • Industrial and automotive products now completely sold out. Even memories are starting to get tight.

Do not be misled by the single-digit growth number. 2011 will be a very strong year for the chip industry, and 2012 will see a double-digit boom.

12 comments on “Stop Agonizing: 2011 Will Be a Strong Year

  1. Parser
    January 28, 2011

    For corporations and CEOs these numbers and predictions are good.

    However, prediction of the strong year 2011 is only the hope for those unemployed; the delay to normal employment typically is a year or more. 

  2. Himanshugupta
    January 28, 2011

    i do not understand how can the growth be in single digit if most things are in short supply or booked to capacity. Is it because of 30% growth in 2010 that the growth in 2011 will be single digit w.r.t 2010? If so, then it makes sense and even good.

  3. Jay_Bond
    January 28, 2011

    Any growth is a positive thing. The 2010 numbers resulted in an excellent year. Even with the projections for 2011 being in single digits, they are still on the growth side instead of losing ground. It is going to be an interesting year for the semiconductor business. If growth meets expectations, can the raw materials be supplied to meet the demand?

  4. itguyphil
    January 28, 2011

    There have been a lot of predictions that a lot of companies are investing in R&D of new products (especially tablets and other miniature devices). Let's hope this means that the manufacturing sector will get a real boost from these predictions.

  5. maou_villaflores
    January 30, 2011

    We have the same thoughts on this Pocharle. The global performance of the economy is doing good in the last quarter of 2010 if this will continue on the first two quarters of 2011 then that is the time we can say 2011 is a strong year.

  6. maou_villaflores
    January 30, 2011

    because some economy is still recovering from the great recession.

  7. Taimoor Zubar
    January 30, 2011

    “Numbers can be very dangerous for our health. Misinterpret, worse still,
    misrepresent the numbers, and you will put the long-term health
    of your company at risk.”

    I agree with you in this that the numbers can really be misleading at times. However, most analysts base their decisions on the financial performance only and rely solely on the profit and loss statement, balance sheet and cashflows. What could be some other non-financial (perhaps non-numerical) measures they should use to make a more realistic analysis of a company's performance?

  8. Himanshugupta
    January 30, 2011

    it is very hard to convince anyone without any backup of quantitative analysis. So balance sheet is an integral part to judge a company's health. I think the non-financial measures to check the health of a company can be the short term and long term strategy, vision and motto. But again as these measures are qualitative, so are the interpretations.

  9. Taimoor Zubar
    January 30, 2011

    I think the non-financial measures have to be made as standards to allow comparison amongst companies. Moreover, these can't be used in isolation and have to be used together with the financial measures to complement the numbers and give a better picture of the performance.

  10. Anna Young
    January 30, 2011

    I agree with Malcolm that 2011 should not be a year of doom and gloom but a year of strong growth. The problem with numbers is that it is never a healthy way of forecasting economic growth either in the present or future but however it is essential as it is a vital measurement tool.

    The over reliance on the use of statistics at times dents confidence thereby resulting in a company avoiding taking risks. I concur with Malcolm that companies need to move forward by taking risks.

  11. seel225
    February 1, 2011

    Record profits for many us companies, China's economic growth makes us think of 2011 will be a strong year. Observing lat week market Dow almost reached 12000 it's good sign for many companies and investors. Numbers can be very dangerous for health but numbers makes your economy rise. I am just hoping 2011 will see a double digit growth.

  12. t.alex
    February 6, 2011

    We all hope 2011 will be a double-digit growth!

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