Supply, Demand Need to be Balanced for Growth to Continue
Online staff -- Electronic News, 8/3/2004
Based on recent divergence in the stock market and quarterly earnings announcements of semiconductor and semiconductor equipment companies, a disconnect has been seen between industry sectors, according to the Information Network.
Even with semiconductor manufacturers such as Intel, Texas Instruments, Broadcom and LSI Logic reporting inventory builds, the number of unsold chips increasing to $830 million at the end of the June from just $12 million at the end of March, and nearly 20 percent of SMIC’s customers experiencing inventory problems, the New Tripoli, Pa.-based market research firm believes these problems may only reflect miscalculations on the supply side, not softness on the demand side. The outcome could be that semiconductor growth will continue and what has been witnessed are merely inventory adjustments.
If supply and demand are not placed in balance soon, the Information Network warned semiconductor manufacturers may have to cut prices quickly to avoid costly write-downs which would translate to lower profits.
The latest economic data has put a question mark on sustained semiconductor growth, the firm said. Retail sales in the U.S., Asia's biggest overseas market, fell 1.1 percent in June, the largest drop since February of last year. The U.S. economy added 112,000 jobs in June, less than half the median forecast in a survey of economists.
The Information Network maintains its forecast of $211.7 billion, a 27 percent year-on-year increase for this year, but sees a disconnect between the semiconductor and semiconductor equipment markets.
The equipment market grew 51.6 percent in Q1 and 51.1 percent in Q2. Excess inventory problems indicates that semiconductor companies do not have a firm grip on production, which is normal, since the entire production process is dynamic with new tools coming online, yields improving, die being shrunk, and next-generation nodal points being reached, the Information Network said.
But has the pendulum swung too far, the firm wonders. When the recovery began in January 2002, the semiconductor industry was in a period of low capacity utilization, followed by capacity utilization creeping up from 73.2 percent to the low 90 percent range recently.
With the anticipated slowdown in 2005, revenues for semiconductor companies are expected to range from 27 percent to 10 percent, the firm said it is concerned for the potential of weakened Q3 and Q4 semiconductor equipment growth, noting that Novellus and Lam Research have already forecast 0 to 5 percent and 5 percent order growth, respectively, while KLA-Tencor and ASML forecast 0 percent order growth.
Failure to cut back production despite surprisingly weak semiconductor sales in June led surplus inventories to swell and semiconductor manufacturers have grown increasingly cautious as they expand capacity, choosing to build out fabs in three or four phases rather than all at once, which should extend the growth of the equipment cycle into 2005, the firm said.
While semiconductor growth is directly tied to the economy and GDP, semiconductor equipment growth is subject to the purchasing decisions of the semiconductor manufacturers. Although the upturn in the semiconductor market started in January 2002, the upturn in the semiconductor equipment market didn’t begin until August 2003, when semiconductor manufacturers presumably felt they needed to create more capacity. This upturn is vastly different from those in the past when there was an inflection in growth curves for both semiconductors and equipment within three months of each other. If they now feel that they have too much capacity on hand, the firm said, then they can just as easily turn off the spigot. In other words, there does not have to be a downturn in semiconductor sales to initiate a downturn in equipment sales, the Information Network said.
Besides actual inventory problems and softness some semiconductor manufacturers are reporting, the perceived notion of a weakened economy and the bearishness of the stock market can have a negative, albeit temporary, impact.
As the pace of semiconductor sales slow, the Information Network predicts equipment pushouts and eventual cancellations, beginning this quarter and lasting through the year. Year-on-year equipment sales are expected to drop well below the 50 percent growth already witnessed, as semiconductor manufacturers rein in expenses and recognize that they overshot their needs.
As the semiconductor industry continues growth through 2005, additional purchases will be made, however, year-on-year growth in Q1 and Q2 will be compared to very strong 2004 revenues in a year of technology purchases, not capacity purchases, the Information Network concluded. |
