Good news, finally, from chip makers
Propelled by PC demand, recovery finally arrives in mid-summer; 3rd quarter sales now look as if they will top 2nd quarter by 10%
By J. Robert Lineback
Semiconductor Business News
(09/22/99, 12:46:17 PM EDT)
SAN JOSE -- The anxiously awaited chip recovery finally showed up, and not a moment too soon. Surprisingly, it arrived with a rush.
After withering in the second quarter, worldwide semiconductor revenues suddenly gained strength in July.
Demand for personal computers--still the largest single consumer of chips -- started sizzling in mid-summer, as production shot up for the back-to-school selling season.
Average selling prices for memory chips and microprocessors reversed a downward spiral that was dampening the 1999 recovery.
Best of all, the global glut of chip-making capacity seemed to be evaporating.
False starts often have dogged market recoveries in the past, but analysts don't seem to have any lingering doubts that this upturn is real. In fact, chip makers now are likely to see their best third quarter of the pat decade, with revenues shooting up 10% over the previous quarter, says analyst Bill McClean, president of IC Insights Inc., based in Scottsdale, Ariz.
All the signs are pointing up. Sales and orders of chip-consuming equipment were unexpectedly strong throughout the summer months. New orders for computers and office equipment in the U.S. reached $40.2 billion in July, an increase of 10.4% over June, the Department of Commerce reported in September.
Then came a bullish new third-quarter forecast from International Data Corp., which upped its estimates for PC unit shipments to 24.8% over the same period last year. The Framingham, Mass., market researcher saw the stronger third-quarter growth driven by cheaper PCs, recovering markets in Asia and Japan, and the continued economic health of the U.S. (see Sept. 8 story).
“Computer orders had one of its biggest jumps I've ever seen in July,” observes IC Insights' McClean. A stronger yen and improving average selling prices for memories and MPUs are the main reasons why third-quarter semiconductor revenues will shoot up as much as 10% over the second quarter, he adds.
“Until now we've seen a couple of 9% increases in third quarters during the 1990s--for example that happened in '93--but there has never been a 10% jump,” comments the veteran chip analyst.
What caught the eye of McClean and other market watchers this time around was the surprising strength in July's chip revenues, which moved up 2.9% to $11.55 billion over June's $11.22 billion, according to the global billings report released by the Semiconductor Industry Association in early September. All global regions showed gains, said the SIA.
Up to that point, the picture had been grim. Global sales growth had been slowing in the second quarter and June's revenues fell 2.8% below May's, based on the three-month moving average used in the SIA report.
July numbers were actually lower than June, but the month didn't turn out to be as weak as it usually is, according to analyst Jim Feldhan, president of Semico Research Corp. in Phoenix. The SIA computes monthly sales data, but does not publicly release them as part of its global billings report. July came in at $11.3 billion vs. $12.6 billion in June.
“It was down, but the caveat is that June is the last month in the quarter, and historically July is one of the worst months in the year,” explains Feldhan. “This time it was not nearly as much of a drop as you would normally see.
April sales was a lot worse than the previous month [$10.3 billion vs. $12.8 billion], “so the three-month average in the global report replaced the bad April with a much better July,” adds Feldhan. He is sticking with his earlier forecast of a 12% increase in chip sales this year.
During the weak second-quarter, chip revenue growth was hammered lower by market share battles between DRAM suppliers and by microprocessor makers attempting to challenge Intel Corp. in the low-end PC arena. But that wave of pricing competition appears to be over, at least for now.
Average selling prices for MPUs jumped to $90 from $72 in June, according to IC Insights' McClean. DRAM prices were still suffering in July from the market-share battles between Micron, Samsung, Hyundai, and NEC, but the picture changed dramatically in August and early September. ASPs for 64-megabit memories jumped substantially on the spot market as demand began to stretch out existing fab capacity.
As a result, the DRAM sector -- the industry's most troubled segment--looks like it's ready to join the rest of the semiconductor industry in the recovery. After hitting a low point in mid-July, DRAM prices have steadily climbed upwards, according to Dataquest in San Jose. It reported that the “lowest price per megabit” was 93 cents in the first week of September, up from 55 cents on July 12.
Spot prices on 64-Mbit DRAMs dropped to as low as $5 in early summer, but then they turned upward. Now spot prices are running as high as $10 per chip, says semiconductor capital equipment analyst Risto Puhakka, vice president of operations at VLSI Research Inc. in San Jose. “At this point, the DRAM business is profitable again,” he says. Now, he believes, battered memory vendors in Asia and Japan are at a point where they can resume investments in existing fabs and build new plants.
But equipment makers are still waiting for these new wafer fabs.. Despite the strong recovery signs, chip makers haven't announced any new factories. “For the most part they are still waiting and upgrading existing fabs or filling out existing shells,” Puhakka explains. “One thing clouding the situation is the decision about 300-mm.” Chip makers have to decide whether they want to wait instead and build the next generation fab, he says.
Another trend that could affect how quickly shortages of ICs could develop is the growing number of chip makers who are now attempting to incorporate the use of third-party foundries into their manufacturing strategies. As a result, fewer device makers are reacting quickly to what now appears to be the eventual shortage of ICs in most market segments.
MOS wafer starts are up in the second quarter and fabs are moving closer to running at full tilt, according to the SIA's Semiconductor International Capacity Statistics. The latest quarterly report placed IC fab utilization at 90.5% in the second quarter, a substantial improvement from the 84.7% reported for the first quarter and significantly higher than the low point of 80.8% in the third quarter last year.
MOS capacity utilization was up at 91.5% in the second quarter, according to the SIA, and recent data collected by VLSI Research shows that figure moving to about 95% and then heading to 100% by the end of the year, warns analyst Puhakka.
Most industry analysts now believe the semiconductor markets are heading into the classic boom-bust cycle, and the longer chip makers put off capital investments, the greater the shortages of parts. It also means, they add, that fab capacity once again is likely to become overbuilt during the next several years.
VLSI Research in September raised its semiconductor equipment forecast from about flat with last year's $26 billion global market to 8% growth this year. The market researcher also hiked its forecast for 2000 from a growth rate of 15% to more than 20%.
There are many signs indicating stronger growth and the need for adding new manufacturing capacity. For example, flash memory is now in short supply and this is pushing up prices, points out IC Insights' McClean. He estimates that flash memory revenues doubled in July to $313 million vs. $156 million in July 1998. “Going from oversupply to under supply happens very quickly,” he acknowledges.
The outlook is even improving for digital signal processors, a market that everyone had previously predicted would have a boom year. Will Strauss, president of Forward Concepts in Tempe, Ariz., had forecast a 25% growth in DSP revenues to about $4.4 billion in 1999. But now, he exclaims, “it looks more like 30%!”
|
