Semiconductors are big business, even in the midst of a tough recession, writes KARLIN LILLINGTON
BUSINESS MAY be dismal in the technology industry generally at the moment, but one sector is definitely bucking the trend. Semiconductors have had two of their best quarters in history, smack in the middle of the hardest downturn in the economy since the Depression.
“We’ve recovered already within 2009,” says semiconductor industry analyst Bill McClean, president of IC Insights. In a market worth $235 billion (€172 billion) last year, he’s predicting 15 per cent growth this year as a “very conservative” estimate – and thinks there’s a very good chance of 20-25 per cent growth, with the semiconductor materials market growing by 17 per cent.
“We’re looking at a good year for the materials markets – actually, a good market for the whole industry,” he told an annual European semiconductor industry conference at Intel this week.
Analyst Malcolm Penn was even more bullish, predicting at least 22 per cent growth in semiconductors for this year.
“That could easily get up to the high 20s,” he says. And he adds that 2011 will be even better, with markets up 28 per cent.
Such glowing predictions for the sector commonly referred to as “the bellwether of the technology industry” should be encouraging to the industry as a whole.
Rising demand for semiconductors generally means rising sales for the goods that use the semiconductors, and a boost across the whole information and communications technologies sector.
What’s driving that growth? In part it is the voracious appetite of new markets such as China and India. While each may account only for about 7 per cent of global GDP, they consume a lot of electronics, says McClean.
For example, China is the largest market in the world for mobile phones, cars and PCs at the moment. As part of its $586 billion stimulus package, the Chinese government gave subsidies on mobile phones and flatscreen TVs to boost consumer purchases.
In addition, both analysts agree, people in economies around the world have held back on buying in the economic crisis and will be ready to spend in the coming year.
Further encouragement can be taken from the fact that most cash from the worldwide stimulus package has not yet been spent, McClean says.
For example, he notes that the US still has $4.2 billion to be spent on rural broadband schemes, having only just rolled out the first contract in December. “Even in a recession, we still sold more PCs last year than the year before, [during] the worst global recession in 63 years,” says McClean.
He also points to positive signs for demand for high-end chips for smartphones, as the smartphone has taken a larger and larger share of the overall mobile market over the past three years – 14 per cent in 2008, 16 per cent in 2009, and jumping to 22 per cent in the first quarter of this year.
“The aftermath of global recessions has always been good. Global recessions are a time of pent-up demand. And the second year is always better than the first year because of hesitation,” says McClean.
By hesitation, he means the disbelief with which people and companies view any nascent recovery. While they concede that things are getting better, they aren’t quite sure that the bad times aren’t about to come back. They hold off on purchases and then splurge in the second year.
McClean says these cycles are very predictable within the semiconductor industry. “We shouldn’t be afraid of global recessions. They create pent-up demand in any booming semiconductor market,” he says.
Penn describes the current market as “the perfect calm”. The semiconductor industry recovery, he says, can be traced in a graph shaped like a “bungee jump – we went straight down and then came straight back up”.
Or, as McClean notes, in a 12-month span, the industry had its two worst quarters ever, followed by its two best quarters ever. He takes a positive outlook on the next decade as well, predicting long-term growth over the next 10 years. “The future of the semiconductor industry looks very bright.”
Penn, however, isn’t so sure about the bigger picture. “The state of the industry is confused and unsure,” he says. “The industry has lost confidence, and that’s bad.”
Even though the average person might view the last decade as one of extraordinary development and innovation in electronics – all the different kinds of devices that use semiconductors – he notes that it was “the lost decade for semiconductors”.
The compounded annual growth rate (CAGR) for the industry for the last decade was only 0.8 per cent, he says. “But you have to be careful. Coincidentally, this started with the best year and finished with the worst.”
So if you take a different 10-year slice, things won’t look quite so grim: “Long-term trends are just that – they don’t alter that quickly.”
While he thinks the long-term picture for the industry is sound, with big growth years in the offing, he is concerned that the sector has paid too much attention to what Wall Street wants and has made changes to accommodate quarterly results that will damage the industry in the longer term – too many mergers, narrower focus within research and development, outsourcing, and changes to manufacturing processes.
McClean recalls that, when he started covering the industry in the 1980s, there were more than 200 chip companies; he predicts there will be only 10 left in another decade.
Penn says that, in particular, the European Union seems to have no vision for the industry when it comes to spending €2 billion per annum – 50 per cent of which is publicly funded – on research and development.
The investments, he says, show no strategic value. This, he says, is true across the whole micro and nanoelectronics sectors, and is where he would like to see significant change.
