2002: The Year of Realized Hopes and Disappointments
(7/8/02) Future Fab Volume 13
By Klaus-Dieter Rinnen, Gartner Dataquest
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The recovery is here. Demand is rising. Shipments are up. Blue sky and all roses? Yes, and no. Yes, we believe the industry has entered into recovery. Despite the choppiness on Wall Street, the recovery is, so far, on track. In the quarterly picture, we are seeing progressive improvements for sales in the electronics industry, albeit from last year’s depressed levels. So, there is reason for a small sigh of relief and maybe first smile, especially as momentum is building for a great 2003. But, no, we are not yet worry-free. The global economic recovery has started but remains frail.
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Remembering 2001, which I am sure we’d all rather forget, the major issue was dismal demand. A global economic slowdown occasioned historically unprecedented liquidations of finished goods as well as components inventories. Together, they caused the return of tremendous manufacturing overcapacity to the industry. Utilization rates fell off the cliff and prices contracted sharply. Where are we on the resolution of these issues today? On the demand side and foremost the economic front, there are tidbits of positive news almost every day. Each is tempered somewhat but at decreasing rate by a bit of disappointing news. Overall, last year’s global economic slowdown is clearly giving way to faster world economic growth. Although the latest GDP data for the first quarter of 2002 appear to overstate its strength, the recovery in the United States is nonetheless progressing somewhat better than expected. Globally, the recovery is also progressing nicely. But being led by the United States, it is destined to lag the U.S. recovery by at least a quarter or two. The nature and character of last year's slowdown suggest the recoveries in the United States and elsewhere will be modest by historical standards. Indeed, economists are generally warning against expecting the kind of recovery experienced in the wake of the Gulf War and Asian financial crisis, given that circumstances now differ significantly from then. The budding global recovery looks to have found its legs. Still, it is susceptible to being tripped up by events in the Middle East and Japan. Israeli-Palestinian hostilities in the Middle East have compromised the war on terrorism and spooked oil markets. A one-two punch of new terrorist attacks and skyrocketing oil prices would no doubt derail a global recovery. This could lead to a second dip in the GDP picture. It is possible but less likely.
Fundamentally, unless demand for electronic equipment never recovers close to historically normal levels (which seems unreasonably pessimistic) the cyclical nature of the semiconductor market almost guarantees that an up cycle is underway and that revenue growth will follow. As the year goes on, we see a broad recovery pattern emerging for electronic equipment applications, albeit at various points in time and speed. Today, the issue has more to do with the rate at which demand returns and how quickly over-capacity is burned off. In the first half of this year, the electronic industry was in a ‘resistance zone’ before breaking out. With the major unit drivers for semiconductor demand suffering from market saturation issues, global economic improvements bode well as they will make buyers, both individuals as well as corporations, feel more confident and willing to consume and replace equipment. For most of the downcycle, consumer spending has been carrying the torch of hope, buoying consumer and automotive electronics segments as well as putting a bottom below PC demand last year. We believe that the individual consumer will remain a stronghold. But the industry still lacks the corporate buyer. Listening to industry executives, it is likely well into Q3 before we see a return of corporate spending in earnest. Until then, the speed of the recovery will be somewhat muted and the market will be moving on soft ground.
Not surprisingly, semiconductor demand and manufacturing utilization have been improving this year. This is good news. Much of the improvement, so far, has been due to the fact that the industry shifted from an inventory liquidation to inventory replenishment. True demand is becoming increasingly visible. With a broad recovery pattern in electronic equipment demand emerging in 2002 and inventory issues resolved, we are anticipating a year-end acceleration in device sales, leading to slow single digit growth, year over year. Consequently, capacity utilization is on the rise, especially for leading edge technologies. Material suppliers are already enjoying improvements in consumption since Q4 of last year. In silicon (wafer) markets, we believe that an 8 percent increase in consumption is possible this year. And on the equipment side, order momentum has finally turned positive as well. Overall, the capital-spending tally, while still showing a double-digit contraction, has moved slightly to the upside of our prior forecast from January. As we anticipated, foundry players have been once again early movers. As in 1999, foundry is leading the charge of new investments. Since January, announced capital spending by foundry has increased by nearly 30 percent or about $1.7 billion. And there is room for further increases before year-end. We expect foundries to raise capex by 15 to 20 percent in 2002, clearly leading spending this year just as in 1999.
Today, there is a lot more positive talk between equipment customers and vendors. The time to plan and prepare for the big boom has arrived. This is the year for semiconductor vendors to make strategic investments in technology and capacity that will leverage maximum profitability in the short to medium term and ensure cost competitiveness in the longer term. New technologies are the focus today. Bookings are on the rise but larger scale commitments tend to be lagging. A lot of inquiries target late 2002 deliveries. Consequently, Gartner Dataquest is holding to its annual forecast for semi equipment (Wafer Fab and Packaging/Assembly combined) at minus 19 percent in 2002. In this, it is important to remember that we are comparing 2002 annual numbers with a 2001 which began with high shipment rates carried over from 2000. Also, the implementation of SAB 101 in the U.S. induces a time lag for when the industry will see booking improvements being recognized in revenue. However, the annual growth figure belies the quarterly acceleration, and we must look at the quarterly projections to get an accurate picture of the near term. We are coming off the bottom of the cycle, and a more positive quarterly acceleration could lift Q4 2002 equipment revenue more than 60 percent over the same period last year. Finally there is some positive news for equipment makers.
In conclusion, 2002 is seeing the realization of the industry’s hope for a recovery. Still, this year presents electronic equipment vendors with cause for trepidation concerning the upcycle. Those expecting an explosion in 2002 are likely to be disappointed. Clearly, the upturn will come and, the longer until it takes off, the faster it will go. With this, all is setting up for a strong 2003. This year, instead of looking at a drop into an abyss as in 2001, the industry is looking once again at a new mountain to climb. What at change! Enjoy the first climb in 2002 and boom in 2003.
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