The Semiconductor Industry serves as a driver, enabler and indicator of technological progress. Developments in the industry determine the way we work, transport ourselves, communicate, entertain ourselves and respond to our environment. The PCs we work on, the cars we drive, the phones we communicate with, the electronic gadgets on which we watch movies, listen to music and play games on, and the planes and weapons used to transport or protect us use semiconductor devices.
As environmental issues have become more of a concern today, semiconductor devices are being made to reduce power consumption, reduce heat dissipation, capture solar energy, create more efficient lighting solutions and so forth.
The past decade has seen big changes in the industry, with most players streamlining operations and transferring more routine production to low-cost locations. This led to the development of the Asian market, where most memory production and backend operations have shifted.
However, since innovation remains largely within the country, the sector is one of the biggest employers of labor, with a corresponding significant impact on the overall economy.
End Market Drivers
The computing and consumer end markets together consume around 60% of total semiconductors sold. Therefore, they have a significant influence on total sector performance.
A number of factors, in combination, are bringing about a complete turnaround in the computing market. The near-term outlook is bleak for semiconductor manufacturers, with IHS iSuppli expecting sales to decline 1.9% this year. The negatives (tablet cannibalization, weaker-than-expected spending by both consumers and enterprises) are outweighing the positives (cloud computing, Windows 8) for now but things are expected to get better next year.
Emerging Markets, such as China, India, Brazil and Russia remain a positive for sector growth. However, this growth is coming at the cost of profits because of poorer purchasing power in these regions. Additionally, the macro weakness in developed regions is also impacting certain emerging markets.
With ultra-portable computing devices gaining popularity, the distinction between consumer and computing markets is blurring in some cases. Of course, the consumer electronics market also includes other gadgets such as LCD TVs, Blu-ray players and smartphones.
The Consumer Electronics Association (“CEA”) expects global consumer electronics sales to be up 5.9% this year, driven by growth in tablets (up 83% from 2011), smartphones (up 24%), networked-enabled TVs (20%) and 3D-enabled displays (75%). A growing number of consumer electronic devices are now being sold into /factory-installed on automobiles.
IHS iSuppli is very positive about semiconductor sales into the communications market and expects both the wireless and wireline segments to make a positive contribution. Wireless is expected to be the stronger of the two, increasing 10.4%, with wireline relatively flat at 0.7%. Increasing data volumes across the world and infrastructure build-outs in emerging regions are positive drivers.
Industrial consumption of semiconductors is expected to be one of the strongest this year, driven by the need for production efficiencies, which in turn is increasing demand for power management semiconductor solutions. IHS iSuppli expects semiconductors for industrial applications to be up 7.7% this year, just slightly short of the 9.3% growth in 2011. Medical Devices (normally included in this segment) is an emerging area where semiconductor usage continues to increase.
The automotive end market is an emerging area for semiconductors. The growing electronic content within this market is a secular trend, as demand for safety, infotainment, navigation and fuel efficiency continue to increase. As a result, semiconductors serving this market should grow stronger than the industry over the next few years, although, we may see some changes in days to come, since nearly a fifth of vehicle production has moved to China and we may expect more to follow.
While 2012 started off well, conditions deteriorated for suppliers somewhat because of the protracted weakness in Europe and sluggish recovery in the U.S. Therefore, IHS iSuppli expects the market to grow just 2.7% for the full year, down from the 10.0% growth recorded in 2011.
The aerospace and defense markets are considerably dependent on government spending and policy making. The commercial aerospace market (which lags an economic downturn or recovery) has started looking up. Production increases should be slightly positive for the semiconductor industry this year.
The outlook for defense spending on the other hand is not encouraging, with focus remaining on intelligence systems and basic weaponry. Electronic weaponry remains a bright spot. So semiconductor manufacturers serving these markets continue to see mixed results, depending on the customers served.
Forecast for the Full Year
Semiconductor sales in the first half of 2012 remained below the level generated in the first half of 2011.
Overall, Semiconductor Industry Association (SIA) projections (based on WSTS data) places worldwide semiconductor sales growth at 0.4% in 2012 and 7.2% in 2013. The Americas region is expected to be up 3.2% in 2012, Japan 1.7%, Asia/Pacific 0.1% and Europe down 3.5%.
IHS iSuppi is even more negative about growth this year, expecting the PC market slowdown to result in a 0.1% decline in global sales.
The major players in the industry may be categorized into chipmakers (OEMs-whether fabless or otherwise), equipment and material suppliers and foundries.
According to estimates from IHS iSuppli, Intel and Samsung remained the top two semiconductor suppliers in 2011, while Texas Instruments overtook Toshiba Corp. to attain the number three position (helped by the National Semiconductor acquisition).
Renesas remained at number 5, followed by Qualcomm , which moved up from the ninth position in 2010. STMicroelectronics remained at number 7, with Hynix, Micron Technologies and Broadcom in the eighth, ninth and tenth positions, respectively. Applied Micro Devices crept up from number 12 to number 11.
Gartner estimates that spending on semiconductor capital equipment increased 13.7% in 2011, on top of the 118.4% increase in 2010. The increase was almost totally driven by wafer fab equipment (“WFE”), with other segments declining mid-single-digits.
However, the research firm expects the equipment market to decline 19.5% to around $52 billion in 2012, growing 19.2% the following year. The decline is expected to be across all segments, with WFE declining 22.9%, automated test equipment (“ATE”) declining 16.5% and packaging assembly equipment (“PAE”) declining 13.5%.
SEMI estimates are slightly different. The research firm expects semiconductor equipment sales to decline 10.8% this year, following a 4.7% increase in 2011. The research firm expects all geographies except South Korea to decline in 2012 and rebound thereafter in 2013.
The increased spending on technology upgrades during 2011 resulted in sufficient capacity for 2012 and 2013. However, the growing demand for semiconductors is likely to encourage the next wave of spending some time in 2013. At that time, we are likely to see some new fabs, spending on which was averted to an extent in the current cycle through the use of superior technology.
Latest research from VLSI shows that ASML Holdings surpassed Applied Materials (AMAT) to attain the number one spot in 2011. This was possible because of increased spending on lithography tools during the year. Therefore, while the top 15 equipment suppliers grew just 13%, ASML and Nikkon (another supplier of lithography tools) together grew 27%. Tokyo Electron, KLA-Tencor and Lam Research occupied the next three positions, respectively.
However, the story could change again in 2012, because of consolidation in the market. This year, Applied will include Varian (number 13 from 10 months as an independent company in 2011), Lam will include Novellus (number 10 in 2011) and Advantest (number 8) will include a full year of Verigy.
The pureplay Foundry segment has undergone significant changes over the past few years although the top five positions have not changed much, according to research from Gartner. Taiwan Semiconductor Manufacturing Company (TSM) remains the leader by far, followed by Taiwan-based United Microelectronics Corp (UMC). GlobalFoundries remains at number three, with Chinese foundry Semiconductor Manufacturing International Corp (SMI) at number four. The only change was with respect to specialty foundry TowerJazz (TSEM), which displaced Dongbu Hi-Tech to jump to the fifth position.
A few clear leaders are emerging in the foundry segment – Taiwan Semiconductor at the trailing edge, GlobalFoundries at the leading edge and Tower Semiconductor in the specialty category (analog). Additionally, Intel and Texas Instruments’ foundries make them two strong contenders with leading edge capabilities.
One of the primary beneficiaries of the growth in mobile phones, tablets and the like is ARM Holdings (ARMH), with its power-efficient, low-performance chip architecture. With new versions of ARM chips coming to market, it is likely that the chips will gradually spread to the server segment as well (not a 2012 phenomenon). Others would be Qualcomm , Samsung and Texas Instruments, all of which are big semiconductor manufacturers that use ARM architecture.
Although we remain cautious about Intel’s growth initiatives in mobile and believe that the macro situation remains a deterrent to Ultrabook sales, the company’s market position, cash balance, technology lead, and management strategy and execution are positives.
Analog companies with a focus on the communications, mobile and networking technologies such as Broadcom Corp and TriQuint Semiconductor (TQNT) may be expected to hold up better than others in the next few months.
The largest foundry, Taiwan Semiconductor is also likely to do well and valuation is attractive. Additionally, the patent war between Apple (AAPL) and Samsung may have Apple moving production to another foundry and Taiwan Semiconductor could be the beneficiary.
We believe that inventory rebalancing and adjustment continue to date. Given the uncertainties in demand, we think that semiconductor manufacturers will curtail investment in capacity although technology purchases could continue. In this environment, we would avoid investment in equipment companies, such as Applied Materials, KLA-Tencor, Lam Research, etc.