Analysis: IC industry returns to double-digit growth average
By Bill McClean
Silicon Strategies
01/21/2004, 11:00 AM ET
The following article was contributed by Bill McClean, president of IC Insights Inc., a market research firm based in Scottsdale, Ariz. The following information was excerpted from IC Insights' newly released 2004 McClean Report.
IC content as a percent of system sales
The driving force behind the historically high growth of the semiconductor industry as compared to the electronic systems market has been the increasing value of semiconductors used in electronic systems. Figure 1 shows the historical and forecasted trends for the average percentage of electronic system production that semiconductors represent. Through 2003, the peak percentage was 21.6 percent, reached in the semiconductor "boom" year of 1995. The 2000 semiconductor content figure ended up being only 0.6 of a percentage point lower than the record high set in 1995.
In the 19-year period from 1984 through 2003, the "percent semiconductor" value climbed about 11 percentage points, an average increase of about one-half point per year. As was shown in Figure 1, the 1995 and 2000 percentages increased 3-4 points in each of these years, well above what is considered typical. However, the 1996-1998 time period helped "correct" 1995's extraordinary leap in percentage by registering declines. In 2001, another "correction" occurred as the percent semiconductor figure receded by 4.4 percentage points from 2000.
IC Insights forecasts that the semiconductor content percentage will not surpass 1995's record level until 2007. Assuming a continuation of the IC industry cycles, the percent semiconductor figure is again forecast to reach another cycle "peak" in 2004 (21.5 percent), decline to just below 20 percent in 2005, and hit another cyclical peak in 2008 at 25.0 percent.
Of course, the trend of increasingly higher semiconductor value in electronic systems cannot continue forever. Assuming an annual increase in the percent semiconductor figure, at some point in the future, semiconductor content of an electronic system would have exceeded 100 percent!
The question then arises, what is the uppermost limit of the percent semiconductor number? In the previous two cycles, the peak years' (i.e., 1995 and 2000) ratio reached about 21 percent before falling back 3-4 percentage points. Whatever the ultimate semiconductor content ceiling is, once it is reached, the average annual growth for the semiconductor industry will closely track that of the electronic systems market (i.e., recently averaging about 4-6 percent per year). It should be noted that IC Insights does not expect this "ceiling" to be reached within the next five years.
IC Insights believes that IC producers will have increasing pricing leverage in the marketplace over the next five years. This "new-found" pricing power (although subdued in comparison to IC price increases of over 20 percent per year in the mid-1990's) is expected to be due to lower capital spending as a percent of sales by existing IC manufacturers (discussed later in this article), fewer new IC suppliers entering the market (the recent surge of new Chinese IC companies is assumed to be the last large group of newcomers to enter IC production), and an increasing number of existing IC producers off-loading production to IC foundries (which will serve to lessen overspending in specific IC product areas).
With relentless pricing pressure on electronic systems expected to continue, due primarily to increasing electronic system production taking place in China, semiconductor sales as a percent of electronic system sales are forecast to set an all-time high in 2007 of 22.1 percent and reach 25.0 percent in 2008.
Spending as a percent of sales
The inherent lag time in getting a new IC facility built and productive, coupled with the usual industry-wide over- and under-spending has helped create the history of volatility in IC fabrication capacity. This in turn has led to occasional drastic fluctuations in IC average selling prices (ASPs), which have also helped create the historical boom-bust periods in the IC market.
Historically, the IC industry has rarely stayed at its historical 22-23 percent spending-to-sales ratio for very long (Figure 2). It seems that the IC industry is usually overreacting with its spending budgets one-way or the other. In 2000, capital spending as a percent of sales surged to 30 percent. In 2003, spending as a percent of sales fell to only 18 percent. It appears the semiconductor industry is caught in a perpetual boom/bust cycle with regard to capital spending outlays (and subsequently, capacity).
It is interesting to note that capital spending as a percent of sales in the current cycle dropped below the low of the early 1990's cycle (i.e., 19 percent). Moreover, even after the capital spending pickup in the second half of 2003, spending as a percent of semiconductor sales was only 18 percent for all of 2003. IC Insights believes that the low spending rates of 2002 and 2003 will ultimately lead to IC production capacity shortages in 2004, especially for leading-edge devices.
Summary
Historically, capital expenditures as a percent of total semiconductor sales averaged 22-23 percent for semiconductor producers. However, as a result of the dramatic restructuring of the IC industry since 2000 (Figure 3), IC Insights believes that this "normal" level of spending has moved down to 20 percent, or less.
Overall, the restructuring of the IC industry will make semiconductor industry capital expenditures more "efficient!" This increased efficiency will eventually lead to rising IC ASPs, higher revenue per wafer start, a return to double-digit average annual growth rates for the IC market (the 1993-2003 average annual growth rate for the IC industry was only 8 percent), and higher semiconductor content as a percent of electronic system sales. IC Insights believes that these trends will ultimately provide a much "healthier" IC industry for the IC suppliers, and the companies that serve them, than has been the case since 1995. |
