Chip demand rising as corporate spending loosens up
By Bolaji Ojo, EBN
Silicon Strategies
10/03/2003, 7:27 PM ET
NEW YORK -- The fog shrouding visibility in the semiconductor market since late 2000 appears to be lifting gradually, as a more stable industry outlook offers suppliers a chance to improve margins and update their product mix.
While even the most optimistic suppliers are unwilling to declare a full market upswing is imminent because consumer confidence is eroding and there is slow to nonexistent employment growth, equipment makers, including those in the troubled communications sector, are sending positive signals through a subtle change in ordering patterns.
Several quarters ago, most parts orders were quickturn, with minimal notices given to vendors. Today, more orders are arriving for purchases meant for delivery 30 to 60 days out, which points to greater confidence in the demand outlook, according to industry executives.
"Our customer base is 100-percent schizophrenic and they were placing orders down to the wire because they don't want to be caught holding inventory," said Brian Halla, chairman, president, and chief executive of National Semiconductor Corp., (Santa Clara, Calif.). "Today, our key OEMs are certainly giving us indication that there is a turn in their business.
"Before, nobody wanted to be caught holding inventory, and now nobody wants to be caught without products," Halla said.
Some of the urgency could be ascribed to the higher capacity utilization rates at chip manufacturers. Generally, latest-generation fab utilization rates are said to be in the 90-percent range, while total average utilization rates are estimated to be in the 80%-plus range. OEMs have also realized that component prices are not likely to drop much and may even begin to edge up, according to analysts.
"We've gone past the low point in pricing, and now everybody is watching closely and trying to gauge what's likely to happen next," said Greg Sheppard, executive vice president at market research firm iSuppli Corp. (El Segundo, Calif.). "It hasn't hit the panic-button stage yet, but buyers are becoming more nervous because some of the power they had in pricing is slipping away."
Other factors are contributing to the improved visibility. Until now, the consumer sector had driven improvement in the electronics industry, as businesses focused on lowering costs and delayed the IT equipment replacement cycle many thought would start in 2002.
However, Peter Fischl, chief financial officer at Infineon Technologies A.G.(Munich, Germany) said his company has noticed a pickup in demand in several end markets and is seeing higher demand for memory products as corporations move to replace aging hardware.
"The corporate IT replacement cycle is beginning to happen," Fischl said. "This recovery is not like what happened in 2002 when we saw a strong first half but no bounce in the second half. This time, we have seen seasonal buying, but there is also a resumption in corporate spending."
National's Halla said finished equipment is no longer sitting on shelves, which means there is actual demand from customers, both consumers and enterprises. Both Halla and Fischl noted that their companies were spending more on their corporate networks than in the past two years and believe this is occurring elsewhere as well.
"We in the IT sector will do anything to keep productivity up," Halla said. "Still, we're not calling it an industrywide recovery yet. We're all watching to see how 2004 will turn out."
Because of its high exposure to the wireless market, National said its sales in Japan, where camera phone demand has risen sharply, first picked up about three quarters ago. With unit demand still rising all over, Halla expects sales to swing higher, although the lack of pricing power is likely to keep National at a 4 percent to 7 percent sequential quarterly growth rate.
iSuppli estimates spare capacity could easily come on line in the event of a sudden increase in demand. As a result, component pricing would continue to favor OEMs in the near term. This explains persistent reluctance by suppliers to raise capital expenditures since their main objective in the current climate is to raise margins and improve profits.
In fact, many chip companies are looking to outsource more production to keep capex budgets lean. National, for instance, aims to keep its capex at 10% of sales, down from its historical 15% to 20% range. The company's partnership with Taiwan Semiconductor Manufacturing Co. Ltd. means it doesn't need to build a 300mm fab, according to Halla.
"All the reorganization measures in the world won't help if we raise capex now, because it would only result in a death spiral," said Lewis Chew, National's chief financial officer, during a presentation to analysts last week. "Capex is no longer about what you can afford but what you should spend."
Analysts said that suppliers' reluctance to raise capex underscores the need for OEMs to evaluate their procurement strategies as the demand environment improves. iSuppli estimates that available capacity would be sufficient for immediate needs but that a 10 percent increase in utilization rates could stretch supply across the industry.
"We have been advising OEMs to make sure their relationships with suppliers are in order," said iSuppli's Sheppard. "This is a good time for them to lock in the purchasing contracts. It's also important for companies to have contingencies lined up because we are seeing something above and beyond seasonality." |
