ISS 2010 report: Economists, analysts expect 2010 to be better than expected

USA: The 33rd annual SEMI Industry Strategy Symposium opened in Half Moon Bay, Calif. with economists and a semiconductor industry analyst strongly agreeing on one perspective – the economy has turned the corner, the semiconductor industry is poised for strong growth, and the entire semiconductor supply chain is not ready for what could be a strong period of continued growth.

The first speaker, Robert Fry, senior associate economist of DuPont, noted that housing led the global economy into recession, and that housing is now leading us out – but slowly. Median U.S. home prices have fallen from up to 400 percent of median income to the more “usual” 285 percent of income. This is a good sign, but Fry noted that home builders cannot get credit, and there is an “echo” effect from residential to non-residential; if no one is building homes, it’s unlikely that malls and office complexes will be built.

Fry then pointed out several indicators that show positive growth. Banks are now more willing to lend to each other, and that slow loosening of capital should soon extend to businesses and mortgages, and that will help with growth. Business orders are up, but Fry noted that the psychology of this recovery is such that most business purchasing is still at low levels.

According to Fry, Asia is leading the rise of the global business cycle, with China, Korea, Taiwan, and to some extent Japan leading the way. He expects to see many indicators positive in 2010 Q1, including the US employment rate.

In concluding, Fry said that right now, people are too negative about the economy. His analysis shows that cuts in employment in this recession were disproportionate to the reduction in US GDP, and he expects many businesses to have a difficult time catching up with the opportunities that will be presented in the near future.

Duncan Meldrum, the chief economist (retired) of Air Products and Chemicals, took a long-term view and noted that the last two significant financial crises resulted in new institutions being created to prevent recurrence and help recovery. In 1907, the Federal Reserve System was created, and in 1929, the New Deal led to the creation of the SEC and other regulatory entities. Meldrum noted that it is entirely possible that a new institution may be created out of this recovery.

Meldrum explained that the growth of the last decades was due to several factors – free market capitalism, central banks getting control of inflation, and lowered barriers to trade (meaning capital could flow more easily). This led to a global boom in productive investment as global fixed investment increased to well over GDP growth.

But with this growth, credit-driven demand surged. Credit drove household net wealth, and as the Federal Reserve Bank raised rates (albeit slowly) to slow the exuberance, the housing market softened, and fear and panic replaced the euphoria of growth. This fear and panic spread throughout the economy, and companies were quick – perhaps too quick – to cut back, and to cut too far.

Consumer attitudes in the US are changing, he said, with a good example being the increase in the US savings rate. But is this a permanent shift, or will consumers go back to old behavior? Meldrum notes that this may be a permanent shift, as US consumer confidence remains at recession levels.

However, we are now in recovery – widespread panic or fear have replaced with grumbling acceptance. We are in for a long adjustment period, as uncertainties provide “headwinds” for full emergence from the recession. Concerns about different government (Washington, D.C.) policies, employment figures, and so on are creating uncertainties that will slow growth.

Meldrum sees a possibility that the recovery will not be a “V”, or a “U”, or a “W”, but rather a square-root sign as these headwinds “flatten” the cycle. He expects five years of growth before peak, and he expects that much of that growth will be in the developing world. He sees business investment in the US as likely to be muted in favor of the developing world.

However, Meldrum said, there is a positive offset. The wealth levels in many parts of Asia, Latin America, and perhaps even Africa are rising, and this will lead to more consumption from those regions, especially for products that communicate, entertain, and are cheap; exactly those products that are based on semiconductors.

Meldrum closed in noting that the semiconductor industry made the most rapid adjustment of output in the world during this recession. Even with the steep “V” curve in MSI measures of wafer output, Meldrum notes that the trend from 2005 to 2015 in volume of MSI growth will be about 6 percent.

The morning ISS session was closed by Bill McClean, president of IC Insights, who noted that 2009 was only the third time that electronic systems production decreased. But, he said, 15 percent semiconductor growth for 2010 is a conservative estimate.

In support of this, McClean offered the example that global recessions lead to pent-up demand, and that 2010 should be “booming” year based on the growth experienced immediately after the last three recessions.

For example, McClean said, we have just gone through the worst global recession in 63 years, and cell phone unit sales are down all of 5 percent. And by the way, the smartphone share of demand is now up to 22 percent. In a recovery, this segment will demand a lot of silicon. PC shipments, McClean said, are flat – in the worst recession in 63 years. He is forecasting about 10 percent PC growth, but it could be more.

So, McClean said, this industry had the two worst declines (4Q08, 1Q09) in its history, but they were immediately followed but the two best quarters ever. We are back to where we were in 3Q08, but the global recovery is just starting.

“We took 6 percent of our fab capacity offline,” he said, but 300 mm is sold out for 4Q09. There will be excess demand and constrained capacity, so he expects ASPs to rise – the long-term CAGR for IC units is still 9-10 percent, and he sees pricing up about the same.

McClean closed by saying that he expects at least 45 percent growth in capex spending in 2010, followed by at least 25 percent in 2011. But it will take some time, he said, for the industry to catch up with the missed investment over these last two years.

Source: SEMI, USA