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Industry Insights Archives

Industry Insights: (October, 2011)

Before taking a look into the crystal ball to attempt an outlook for 2012, it is worth taking a quick look at the past from both a people and industry perspective.

A couple of weeks ago, I attended a 50th reunion of former Signetics employees. Do you remember the name, Signetics? It was the first pure integrated circuit company to be formed as a start-up, which was spun out of Fairchild in 1961 and was my first employer from 1970 for 14 years. It was first acquired through a majority investment by Corning and then sold in 1975 to Philips, who managed it as an independent, stand-alone unit until the late 1980s. Naturally, at the recent reunion we reminisced about the "good old days" and how Signetics was known at that time as "The Good People Company". This was during the early days of Silicon Valley when we all worked hard and played hard. This branding slogan was used in recruitment activities, but was based on a culture that encouraged teamwork and invested in training to develop the capabilities of its employees. Today, much has changed.

While networking in and around the semiconductor supply chain throughout this past year, I have noticed that, in general, stress levels are at all-time highs. Couple this with the observation that most companies are operating profitably throughout the cycles, and my conclusion is that the "jobless recovery" from deep recessions in 2001 and more recently 2008/9 is taking its toll. Andy Grove, in his book of the same title, observed that "Only The Paranoid Survive". Well, if that is true, today's executives are surviving on a very healthy dose of paranoia.

The paranoia I am talking about is over the potential for a "double dip" recession. This has caused most companies to constrain hiring and spending as much as possible during the recent recovery. This is great for "Wall Street" investors with more companies maintaining profitability through weaker business conditions. The result, however, is that fewer staff are carrying more responsibilities and heavier workloads. Combine this with less skills training and the resulting "sink or swim" situation ends up in stressed-out work environments. Employees are often promoted to manager status with little or no training on how to manage and motivate people while treating them with respect.

Another change has been the disintegration and globalization of the semiconductor supply chain with more manufacturing migrating to Asia. This causes work days to stretch out, "burning the candle at both ends" as people extend their availability to work across multiple time zones to call suppliers in Asia, customers in Europe or software teams in India.

It is unlikely that many of these new work pressures are going to change in the short term. We have enjoyed many productivity gains thanks to technology, however these appear to be slowing. I remain hopeful that companies will soon see that there are similar productivity gains to be realized through improvements in staff training and development.

Turning now to the business side of things, we all know that the biggest driver of the electronics market is the consumer. Hence the semiconductor market has a high correlation to discretionary spending, employment and the economy. One of the best indicators to use in monitoring demand is IC unit volume. Admittedly, it is influenced by the building and depletion of inventory, however, a look at historical medium term unit growth rates tells an interesting story.

Prior to the year 2001, the long-term unit growth rate was around 10 percent per annum. After the recovery from the bursting of the Y2K bubble, consumer demand stepped up, due in large part to the emergence and proliferation of mobile electronics. From 2002 until the economic crash of 2008, chip units grew at an incredibly strong 14 percent annual rate. While it did reverberate strongly throughout the supply chain, the 2008 crash was sharp and relatively short-lived for the semiconductor industry. Unit chip volumes bounced back quickly from that major geopolitical event and, since 2010, instead of returning to the 14 percent growth trend, have been on a noticeably slower growth rate below 10 percent.

The thing to keep in mind is that despite today's weak economy, high unemployment and limited disposable income, we note that chip unit shipments are continuing to grow and are far from declining. The demand for more connectivity or simply even more "cool" products seems relentless. While most people now own a cell phone, it is the younger generation who clamor for the latest and greatest gadgets. Personally, I change my mobile phone on average every 3 years, but I note that the younger generation simply "has to" change theirs every one to two years. Whether this is because there is a new one out with more features or they have simply damaged and need to replace the old one, the result is the same. We can't live without them. The same appears to be happening with tablets. Personally, I have not found a use for a tablet to exist in my life between my smart phone and my laptop, but it is clearly a huge success and is one of the top products driving chip demand. This seemingly insatiable demand for portable electronics is not going to change, and, if anything, will intensify as even more new cool products are brought to market and the economy strengthens.

As long as the economy remains weak, I expect that annual unit growth will remain in the +5 percent to +10 percent range. Since 2008, and even throughout the recession, the average unit selling price (ASP) has remained flat at around $1.35 across all IC types. This is the first recession where the supply-demand imbalance has not driven down pricing levels. I believe that overall ASP will stabilize here for the foreseeable future and, as a result, chip revenue growth should track unit volume with a corresponding +5 percent to +10 percent growth rate through 2012.

However, things do not bode so well for the capital equipment sector. Throughout 2010 and until mid-year 2011, the capital equipment industry enjoyed a very strong recovery and growth period. This has resulted in increased capacity being installed throughout the semiconductor industry and, with slower unit growth, the net result of this increased capacity is lower factory utilization levels. This is likely to continue well into much of 2012 as the slower chip unit growth rate gradually uses up that excess capacity. Capital spending on Test and Assembly equipment tends to be metered out much more incrementally since the lead time for that equipment is significantly shorter than it is for Fab process equipment. As a result, it is likely that test and assembly capital spending will start to bounce back by mid-2012.

The semiconductor industry is maturing, but we need to remember that it is still cyclical and what is being experienced once again is a classic cycle of supply-demand imbalance while the world recovers from the last economic crash.