2009 will not be 2001 repeat for global chip industry

The fact that the ongoing economic gloom has brought some doom for the global chip market is well known. H1-2008 held up well, better than most had predicted. However, now, the economic gloom in the global financial system has managed to nick the US, and Europe, and lately, Japan, into recessionary conditions, taking the global chip industry along with it!

Some fear that the recession will be as bad as 2001 and that 2009 could re-enact 2001! However, Future Horizons' Malcolm Penn differs, and I'd agree with him. In 2001, there was this huge dotcom collapse, coupled with the unfortunate happenings of 9/11, and a 'massive inventory burn just as a huge amount of excess capacity was coming on stream.'

What's the situation now? There's no serious overcapacity, and the pre-slowdown utilization rate were in the 90 percent region. Capex was already in retrenchment, well before the slowdown. Nor are there any serious excess inventory in the supply chain.

So, that only leaves the problem of the global financial gloom. Lot of money is being thrown about at the problem, hoping that it would pull the world out of the mess it currently finds itself in.

But, can the industry afford to NOT innovate? This is the time to innovate and find new ways to come out of the hole it finds itself in. The industry must also reconcile to single-digit growths mostly, from now on, I guess.

There has been no new 'killer device of mass use' like the mobile phone. Simply, no one has been able to come up with any new device of such mass appeal! The mobile phone, as we knew it, was only meant for voice. Now, it ports a camera, an MP3 player, Internet browsing, email, etc. It gave birth to PDAs, and probably, now, mobile Internet devices (MIDs).

It amuses me a lot when I find companies talking about providing full Internet experience on the mobile phone. It amuses me even further when I find a lot of people and companies talking about how they expect people to be on the Internet all the time! Surely, there are other things to do in one's life than simply staying hooked to the Internet! Or maybe, they have a crystal ball to gaze in, all the time!

The industry needs to be careful about all the predictions and technologies. Not all will succeed. What they should try their hand at is at being innovative! Or, has innovation completely gone out of the window?

Chip forecast at 4-6pc range; financial gloom nicks industry recovery!

Early this year, during the IEF 2008 at Dubai, Future Horizons' CEO, Malcolm Penn, had forecast a 12 percent growth for the global semiconductor industry, and that we were all dealing with an industry in 'deep trauma'!

Soon after, the chip market started showing some signs of recovery and actually started to buzz again. This was in early June. Later, in July, the semiconductor industry numbers started indicating that this may not be a bad year after all! It also came to light that lousy memory numbers were holding back overall market numbers.

With the memory market not showing much signs of recovery, several analysts revised their forecasts in August and September, including Future Horizons. In early September, Penn forecast that the global semiconductor industry would probably grow at 4-8 percent.

However, now, with a global slowdown now in place, Penn says that Future Horizons' January (and July) forecast assumptions, and chip market forecasts, are no longer valid. He adds, "We have not yet had chance to fully crunch the numbers, but at first sight, 2008 now looks set to come in at between 4 and 5 percent, with 2009 in the 4-6 percent range."

This is very unfortunate! Just when it seemed a little while ago that the global semiconductor industry was in some stage of a small recovery, the global financial turmoil has more or less, ended that hope!

Penn cautions: "2009, however, could slip negative, depending on what happens to IC unit growth. At the moment we think this highly unlikely, given the 6.1 percent advanced and developing market GDP growth forecast and the fact there have only been two years of negative IC unit growth in the last 23 years, namely 1985 and 2001, both triggered by a massive inventory build."

Obviously, a slowing world economy is bad news for the chip industry! However, the coupling, he notes, is not as strong as one might be lulled into intuitively believing. There have been seven instances in the last 22 years where the chip market has grown in value during a period of slowing economic growth and two occasions when the market has declined in a period of GDP growth.

"IC units have exhibited three periods when they grew in the face of a GDP decline and five occasions when the units declined despite growth in the world GDP. The economy is, thus, not quite king; inventory, excess capacity and ASPs also play a role," adds Penn in his monthly report.

Underlying good news for chip industry
The underlying good news for the chip industry is that all of the other industry trends are good. Inventories do not seem to be seriously bloated; wafer fab capacity utilization levels are high; capital expenditure is low, and has been now for several quarters; and ASPs are in the midst of a long-term structural recovery phase.

Thus, while 2009 IC unit demand must inevitably slow, this slowing will coincide with an inevitable parallel slowing in new capacity additions, itself the result of a significant 2008 and prior Cap Ex cutbacks. The combined effect ought to be a relatively benign decrease in capacity utilisation rates, helping to cushion the inevitable near-term ASP pressures.

Looking at the near-term ASP trends, ASPs overall have been falling during 2008, but they have been falling much slower than the 2007 rate. This means that ASPs are actually increasing when measured on annualised basis.

Slowdown bound to impact ASPs
According to Penn, the economic (demand) slowdown is bound to negatively impact ASPs. What is more important from a market growth perspective however is not that they are falling but how fast they are compared with the same period last year.

While the ASP recovery trend might wobble next year, the underlying trends still look good, providing the world does not slip into global recession.

The immediate world government policy challenge is to stabilize the global financial markets, while nursing economies through a global downturn and keeping inflation under control. "That is quite a steep challenge (it has never before been called upon to be done); the great danger being, aside from the risk of failing, is a return to vested self-interests and protectionism and the impact that this will have on globalisation and future world growth. There is a real danger this is the precursor of World War 3, with economics as the fire-power," he adds.

Penn advises: "Over a longer horizon, policymakers will be looking to rebuild firm underpinnings for financial intermediation and will be considering how to reduce cyclical tendencies in the global economy and strengthen supply/demand responses in commodity markets.

"The electronics industry would also do well to divorce itself from the financial market's casino driven addiction by starting to plan for its longer-term growth needs not the previous (and now seriously discredited) Wall Street greed/bonus-driven quarterly hysteria."

This has indeed been a topsy-turvy year! Apple's iPhone 3G and now, Google's G1 phone have hit the markets. Intel demonstated its Moorestown platform at the IDF in Taipei, promising great things in 2009! Intel also spoke a lot about mobile Intenet devices (MIDs) and what great things these can do.

However, no one, it seems, is able to point out confidently that the cheer in Christmas spend will be back! Or, how, 2009, will pan out! When will the global semiconductor industry see light at the end of the tunnel?

Can Apple lead rebound in NAND fortunes?

There is an interesting piece of news on Digitimes, Taiwan, which says that Samsung has recently told its downstream customers that it will start reducing supply of NAND flash chips from July as Apple, Samsung's key customer, has placed a large batch of orders.

Will this move do anything to the NAND flash market? In the earlier blog, I had highlighted what Future Horizon's Malcolm Penn had mentioned -- that the impact of the Apple iPhone has been minimal so far on the chip market. "It's just one item in a very large and complex mix of products. The overall iPhone volume is miniscule," he says. I would probably go with that statement.

Even Semico, in its recent report, has said that the NAND market has not experienced the 'Apple effect' as has been seen in previous years, so far in 2008, despite the upcoming 3G iPhone (with up to 16GB of storage) and the SSD option for the MacBook Air.

With a majority of the analyst community yet to give the green signal about an industry revival of sorts, everything depends largely on how the new iPhone will do! However, even if it does do well, it just may not be enough!

The consumer confidence is still quite low, and rising oil prices are not really helping. Will these factors have any effect on the consumer electronics segment in the long run? Too early to say though, and do bear in mind that one product or one brand can find it a tough ask to turn around, rather, lead the memory market, and the consumer electronics industry to huge growths.

All of us in the semiconductor/chip industry keep hoping that a strong rebound does happen, and that the industry remains on course of a strong growth in 2008. However, it is not right to pin faith on one product or one brand to lead a revival.

We are probably either to hung up about numbers or about technologies. Especially, whenever a new product or technology comes around, we start banking on that product or technology to revive the industry's fortunes. Great technologies do not essentially lead to market revivals. We have seen that happen umpteen number of times.

Perhaps, it'd be wiser to let the industry have a 'free fall' or 'free growth', if you may, for some time, and let corrections happen over time, rather than bank on something or the other to carry the industry's fortunes forward.