Expect short leadtimes, soft prices for most semiconductors in 2012

High inventory levels and weak demand mean buying conditions will favor buyers

By James Carbone

01/10/2012

Sluggish demand, slow overall economic growth, and high inventory levels mean it will remain a buyer’s market for semiconductors through at least the first half of 2012.

However, buyers could face longer leadtimes and perhaps even higher prices in the second half of the year if high inventory levels are worked off, demand increases, and production capacity is reduced by suppliers.

By most forecasts, the semiconductor industry growth will be in the 3 percent range in 2012. International Data Corp forecasts 3.1 percent sales growth for chips, while IHS projects semiconductor revenue will rise 3.2 percent and the Semiconductor Industry Association forecasts 3.7 percent growth for the global chip industry. IC Insights is more bullish, forecasting 6 percent revenue growth for semiconductors.

Suppliers and researchers said that whatever growth the industry realizes in 2012 will occur in the third and fourth quarters of the year.

“Going into the first half of the year we don't see a lot of things that would boost the semiconductor market,” said Brian Matas, vice president of research for IC Insights in Scottsdale, Ariz. He added that weak chip demand and high inventory levels in the semiconductor supply chain will carry over to the first quarter and maybe into the second as well. For semiconductor buyers, that means leadtimes should remain short and prices stable.

“We don't know what the growth is going to be. What we are aiming to do is outgrow whatever growth there is in the overall market,” said Ganesh Moorthy, chief operating officer for Microchip Technology.Matas noted that 2012 will be “a tale of two halves, where you have slower growth in the first half and stronger growth in the second.”

“We think the first and second quarters will be flat. But we see much stronger growth in the second half of the year,” said Matas. “Part of it is seasonal, but part of it is making up for slow demand in the first half.”

One reason for slower growth in the first half is the impact of the flooding in Thailand on the disk drive and PC industries. The flooding in October shut down the facilities of major hard disk drive manufacturers such as Western Digital and Toshiba. In addition, facilities of suppliers of the drive industry were also closed by the flooding.

While floodwaters have receded, full production of hard drives is not expected to resume until later in the first quarter or second quarter of the year.

The shutdown of hard drive production has impacted PC supply chain, according to Mali Venkatesan, research manager, semiconductors for International Data Corporation (IDC), headquartered in Framingham, Mass.

“The flooding disrupted the hard disk drive industry and that is being felt right now in terms of PC demand.” he said. “You'll see PC demand down a little bit this quarter (Q4 2011) mainly because of the Thailand flood.”

PC demand will also be weak in the first quarter. If PC OEMS cannot buy drives for computers, there is no need to order semiconductors or other parts for computer systems.

Inventory levels are high

Another reason for slow growth in the first half is high inventory levels at suppliers. Researcher IHS reported that in the third quarter of 2011, days of inventory (DOI) stood at 81 days. While that declined from 83 days in the second quarter, inventory levels at suppliers remain at a very high level. In fact, at 81 days, inventory levels are the highest since the fourth quarter of 2008, according to IHS.

Slow growth in the U.S. economy and the debt crisis Europe will also contribute to sluggish sales growth for the chip industry in the first half.

“The same problem that the industry had in 2011 will continue to happen in 2012 at the macroeconomic level,” said Venkatesan. “The U.S. unemployment rate is not going to go down that much and the European debt crisis is still there.” Sluggish growth in the overall economy will mean slower demand growth for end electronics equipment and semiconductors.

>Semiconductor suppliers are reporting a lot of uncertainty in the industry and not much visibility into future demand. However, most suppliers expect at least single-digit growth in 2012.

Most researchers expect the global semiconductor market to post modest 3-4 percent growth in 2012.

Moorthy said he believes Microchip’s business bottomed out in December. “It feels that we are in the last innings of the correction that was going on,” he noted. “The March quarter 2012 should show growth over the December quarter 2011.” However, he would not forecast how much revenue growth will occur for the year.

“We don't know what the growth is going to be. What we are aiming to do is outgrow whatever growth there is in the overall market,” said Moorthy.

Todd Reimund, director of marketing at Linear Technology, based in Milpitas, Calif., said the current business climate was “unsettled because of economic issues throughout the world.” In addition, he noted that “everyone is working off inventories and we don't know how long that will last.”

“We hope the downturn we are seeing now is going to be relatively short-lived,” said Reimund. “We are going to keep developing innovative products and keep our team in place so we can react to our customer’s demand when business picks up.”

Alex Glass, vice president, worldwide channel sales for Analog Devices Inc. (ADI), based in Norwood, Mass., said the revenue outlook “for the next 12 months is uncertain.” He noted that there is “depressed end customer demand which is not necessarily driving the revenue at the same rate we certainly seen in the early part of 2011.”

The outlook seems “less optimistic than the early part of last year. We see flatness in the business in the immediate future,” said Glass.

He added that over the past three or four years, the ability to “project revenue growth out in time has become increasingly difficult to do. End customers really are not carrying large backlogs. Inventory leadtimes are very short.”

Suppliers will see second half growth

We hope the downturn we are seeing now is going to be relatively short-lived. We are going to keep developing innovative products so we can react to our customers’ demand when business picks up,” said Todd Reimund, director of marketing at Linear Technology, based in Milpitas, CalifHowever, despite uncertainty, many suppliers expect business to pick up in the second half as high inventory levels are worked off. They expect demand to pick up from computer, communications, industrial, and automotive segments.

IC revenue from the computer segment in 2012 will rise 6 percent, while sales to communications equipment manufacturers will increase 10 percent, according to IC Insights.

Within those segments PC unit sales will increase only 3 percent, but media tablet shipments will rise 72 percent to 105 million units, IC Insights reported.

Cell phone sales will rise 11 percent, with 43 percent of those unit shipments being smart phones.

Demand from the industrial segment will increase 5 percent while the automotive segment will boost semiconductor demand by 11 percent, according to IC Insights.

While computers, communications and consumer equipment dominate chip consumption, some suppliers are focusing on industrial and automotive customers.

Glass said ADI has had double-digit sales in recent years and one reason was the industrial segment.

“We have a very strong industrial business. There are other segments that contributed to our revenue as well, but industrial is our largest," said Glass. "Strong growing economies like China are really fueling a lot of industrial equipment manufacturing.”

For ADI, industrial includes industrial automation and infrastructure, motor control, instrumentation and military/aerospace, according to Glass.

“We anticipate that our industrial business will continue to grow strongly. Within that sector, energy is one of the faster growing areas, including smart metering applications. These are areas where we are well-positioned area,” he said.

Industrial represents about 40 percent of Linear Technology’s business, but its automotive business is also growing.

“The automotive and transportation market business has been growing the fastest for us,” said Reimund. He added that the segment had represented about 12 percent of Linear Technology’s overall sales, but grew to about 15 or 16 percent in its last fiscal quarter.

“We have a lot of products targeted at the automotive market and there was slot electronics growth within automobiles," he said. Among its products for the automotive are the LTC 6803 for hybrid/electric vehicles; the LTC4000 high-voltage high current controller for battery charging power management; and LT3690, which is a 36V, 4A, 1.5 MHz synchronous step down switching regulator.

Strong growth for MCUs

Automotive, industrial, computer, communications and consumer segments will drive some types of semiconductors more than others in 2012, judging from the forecast growth rates of some semiconductor products.

The 32-bit microcontroller market will post 15 percent revenue growth in 2012 as the chip gets designed into more industrial equipment and automotive systems.While the overall semiconductor industry will grow 6 percent in 2012, according to IC Insights, microprocessors, NAND flash memory, and some microcontrollers will post double-digit growth.

For instance, 32-bit microcontrollers used in automotive and industrial applications among others, will post 15 percent revenue growth in 2012, according to Matas. Microprocessors will also grow 15 percent.

“Telecom special purpose logic, which are application-specific processors such as the A4 and A5 used in smart phones and media tablets, will grow 12 percent," Matas noted.

Automotive analog and special purpose logic chips will post 11 percent growth.

Revenue from display drivers and programmable logic devices will grow 9 percent growth, while 16-bit microcontroller revenue will rise 8 percent. Sales of industrial and other special purpose logic, telecom analog parts and voltage regulators will increase 6 percent.

“Two thirds of the products we expect will grow slower than the overall IC market,” said Matas. “The overall IC market will rise 7 percent.”

The worst performing semiconductors in terms of revenue will be DRAM, SRAM and EEPROM. DRAM revenue will decline 3 percent, SRAM will fall 11 percent, and EEPROM sales will drop 11 percent.

“For the memory category as a whole we are forecasting 3 percent growth only because of the strength of NAND flash which will grow a healthy 14 percent,” Matas added.
“We have a very strong industrial business. There are other segments that contributed to our revenue as well, but industrial is our largest," said Alex Glass, vice president, worldwide channel sales for Analog Devices Inc. (ADI).

Digital signal processors and gate arrays will decline 3 percent.

Advantage: Buyers

While demand will be strong for certain semiconductors, buyers should find favorable supply conditions for most chips through much of 2012, especially in the first half. However, buyers should keep a watchful on the production capacity plans of suppliers.

Capacity cutbacks would lead to longer leadtimes and firming prices, especially if there is an increase in demand, which is likely in the second half.

Another concern for buyers is the reduction in capital spending by chipmakers in 2011. The lack of investment in 2011 will eventually mean longer leadtimes and higher prices for some parts, but not necessarily in 2012.

“Capital spending in the industry declined 15 to 17 percent or so in 2011, but a lot of companies had upgraded their facilities earlier,” said Matas. Because demand was sluggish in 2011, there wasn’t “really a need to spend a lot more” to increase capacity, he said.

“I don't think there will be a big supply issue in 2012. Supply is in a steady state right now. We will see how long that lasts,” Matas noted.

Buyers can expect soft prices for most products in 2012.

“Customers continue to need, require, and expect healthy price decreases year-over-year driven by the end markets that they compete,” said Glass of ADI. “ADI tries to be supportive of that as much as we can, but I don't know if we are necessarily going to see anything particularly unique next year in terms of prices.”

Glass added that leadtimes for most products have 6-to-8-week range and will likely remain in that range for 2012. However, there could be some leadtime stretching if demand remains sluggish.

The market for analog semiconductors will rise to $47.6 billion in 2012 and will continue to increase until 2015 when revenue will reach $58 billion.“It’s going to be very interesting time if customer demand continues to soften,” said Glass. “There are already indications in the industry in general that capacity is being trimmed.” If that happens, leadtimes could stretch when chip demand rebounds.

“Normally what happens is when customer demand comes back, it tends to come back very quickly,” Glass added. However, suppliers do not necessarily respond quickly to the increase in demand by bringing back more production lines. Often, they take a wait-and-see approach to see if demand continues for several months before restarting production as result leadtimes stretch.

Glass noted that if demand stays in production is reduced, there could be some leadtimes expansion as early as March.

“I would not necessarily expect this to affect ADI particularly. We have plenty of inventory in place,” said Glass.

Jim Carbone Jim Carbone is a freelance writer covering the electronics supply chain. A veteran journalist, Jim was a writer and editor for Electronics Purchasing and Purchasing magazines for 21 years. He covered electronics distribution, semiconductors, passive components and connectors for the magazines. He also wrote extensively about the strategic purchasing strategies of electronics OEMs and electronics manufacturing services providers. Jim was a member of an editorial team that was a finalist for a Jesse Neal Award-- considered the Pulitzer Prize of business journalism-- for print and online stories in 2009 about buying during the recession. He also wrote content for Purchasing.com, which was named a Top 10 Great Website by Media Business Magazine. Before covering the electronics industry, Jim worked as a reporter and editor for United Press International for nine years. He started his career as a newspaper reporter and photographer. Jim is a graduate of the State University of New York at Albany.