Mid Year Forecast: A surge in 2004, then a slowdown
by Bill McLean, IC Insights
EE Times
06/02/2004, 10:00 AM ET
Below is an article from Bill McLean, president of market research firm IC Insights Inc. (www.icinsights.com; Scottsdale, Ariz.) prepared for EETimes' Mid-Year Forecast edition The full selection of mid-year forecast articles could be found here when this article was first posted..
After surviving the record-breaking whipsaw action of the IC market in 2000-2001, many producers are attempting to approach the current upturn more conservatively. Nonetheless, many of the major indicators of market health that IC Insights follows are now forecast to reside at excessively high levels in 2004 (although not as high as in 2000) compared with their historical averages.
Overall, there are three major factors that typically cause, or are part of, IC industry downturns: global recessions, inventory burns and/or overcapacity. IC Insights believes that the downturn portion of the current cycle (2005-2006) will en-counter overcapacity and an inventory burn. Although a global recession is not incorporated into the 2005-2006 forecast, slowing worldwide economic conditions are anticipated.
IC Insights expects worldwide GDP growth to slow to 3 percent in 2005 after a strong, 4.5 percent increase in 2004. Electronic system production is also forecast to slow, from an 11 percent surge in 2004 to only a 2 percent increase in 2005. It should be noted that another "industrial depression-like" period for electronic system sales like that of 2001-02 is not expected through 2008. In retrospect, we consider the steep drop in electronic system sales during 2001-2002 to be a fluke.
Capital spending
IC Insights forecasts that semiconductor industry capital spending will surge at least 53 percent in 2004. A survey of semiconductor company spending budgets compiled in the first quarter reflected a 48 percent increase in planned capital expenditures for the entire year. However, assuming the 2004 semiconductor industry grows at a rate of 27 percent (forecast) or greater, we expect semiconductor capital spending to actually increase at least 53 percent, a minimum of 5 points higher than the sum of the company budgets as of the first quarter.
It is interesting to note that the dollar volume difference between using the 48 percent survey figure for 2004 semiconductor industry capital-spending growth and IC Insights' 53 percent forecast is $1.1 billion. This $1.1 billion amount is less than half the cost of one full-production 300-mm fabrication facility. Moreover, we believe that $1.1 billion could easily be added to the total 2004 capital-expenditure outlays by having some companies (for example, Intel) merely spending at the high end of their current budget ranges.
There are many factors that influence the infamous semiconductor industry cycles, and capital spending is one of the most important. IC Insights believes it is extremely useful to track semiconductor capital-spending levels closely because they yield significant insights into the supply side of the basic supply/demand equation. In turn, the semiconductor industry supply factor ultimately determines trends in semiconductor average selling price.
It should be noted that since 1978, the worldwide semiconductor market has never grown more than 8 percent in the year following a year when the industry's capital spending increased more than 50 percent. As noted earlier, IC Insights forecasts that worldwide semiconductor industry capital spending will increase at least 53 percent in 2004.
That prediction is relatively conservative compared with most of the previous "overspending" years. However, historical figures remind us that capital-spending budgets and forecasts put forth at the beginning of a year often do not resemble the actual spending results for that year. For example, Texas Instruments Inc. announced in April that it would increase its 2004 capital-spending budget from $1.1 billion to $1.3 billion. Moreover, STMicroelectronics stated in April that it was raising its 2004 semiconductor capital-spending budget from $1.6 billion to $2.2 billion.
Additional announcements by semiconductor producers regarding the boosting of their capital-spending budgets for 2004 should now be viewed as increasingly bad news for the 2005 semiconductor market.
While overspending by semiconductor producers in 2004 appears to be a given, the question remains whether the semiconductor industry can avoid its typical "irrational exuberance" approach to spending in favor of a more cautious one (that is, register a capital-spending increase of less than 60 percent this year). The health of the semiconductor market in 2005 will be significantly influenced by how this question is eventually answered. |
