Semiconductor industry revenue to jump 17 percent in 2010!

In order to put some perspective into the current economic climate, it should be noted that this year, Databeans is expecting the chip market to amount to just over $200 billion, which was the size of the market nine years ago. After several years of strong growth, 2008 saw the entire market slip 3 percent from the year before, from $255.7 billion to $248.6 billion in revenue.

The industry agrees that 2009 will be undoubtedly worse due to numerous factors. The inventory issue, particularly in the memory markets, has contributed to falling ASPs and reduced profits. However, Databeans believes that it is the meager replacement rates for typically strong application categories such as mobile handsets, notebook PCs, and consumer electronics, spurred by panic in the credit sector which has hindered consumer spending, and thus reduced demand for ICs.

While this industry recession shows some similarities to the one that occurred in 2001, when semiconductor sales plummeted by 32.5 percent and took nearly three years to return to 2000 levels, Databeans believes this crisis will be far shorter lived.

The primary difference is that the unprecedented growth that occurred between 1999 and 2000 caused such overcompensation in production that the following recovery followed a “bathtub effect” or a rather long and flat stabilization to return to previous profits.

Alternatively, the current crisis caused primarily by temporary macroeconomic issues will recuperate at a much faster rate. After falling 17 percent in 2009, Databeans predicts a “V-Shaped” or “Boomerang” recovery for the semiconductor industry, with a total year-over-year increase of 17 percent from 2009 to 2010.

It is predicted that by 2011, total IC sales will regain momentum and surpass the peak seen during 2007, with $269.1 billion in revenue. We believe that the market reacted swiftly to the financial meltdown and that with little inventory in the channel now, production will begin to flow again and not remain stagnant as it did in 2002.

This improved situation isn’t likely to happen all at once, but certain indicators show that recovery may be sooner than expected. The handset industry, a traditional bellwether for overall semiconductor health, is estimated to have lost nearly 20 percent of its sales in the first quarter, but was still considerably better than the 35 percent decline in Q4 2008.

Nokia, the world’s leading handset supplier with 38 percent of the total market share, is still selling well, particularly in the ever growing Smartphone category, which is expected to perform fairly well throughout 2009. At the same time, the company’s key chipset supplier, Texas Instruments, announced better than expected sales for the last two months. Investors have responded - over the past month, Nokia shares have risen by 45 percent.

China is expected to factor into IC market revival tremendously. Already China's industrial output growth jumped 8.3 percent in March, up from the 3.8 percent rise of the first two months, as domestic demand continued to improve. With low penetration rates for consumer electronics, mobile handsets, and laptop computers, combined with strong cash savings, increasing Chinese consuming habits will likely be a key factor in worldwide recovery.

China’s technology companies have also done surprisingly well during the first quarter, even amidst the global recession. For example, the country’s leading wireless provider China Mobile’s 2008 profit managed to jump nearly 30 percent, as revenue grew 16 percent to $60 billion. The company added more than 7.3 million subscribers per month last year, reaching 457 million customers and enjoys a 70 percent share of China's wireless market. This has been a major factor for Nokia’s continue success in the region, as it is China Mobile’s principal partner in the country’s 3G network infrastructure.

Ultimately, a combination of factors will lead to a gradual recovery in both pricing for ICs and consumer spending habits. This year will still be a difficult journey for many OEMs and semiconductor suppliers, with consolidation, reduction, or restructuring on the horizon. Ultimately, Databeans views the situation as troubled, but still showing signs of improvement.