Sunday, January 22, 2006
BY ROB BERNARDI Columbian forecaster

The Semiconductor Industry Association reported in its 2005 annual report that this past year, more transistors were produced -- and at a lower cost -- than grains of rice. That's an astounding number to think about. So it shouldn't come as a surprise that 2005 is one for the record books.

The SIA said worldwide semiconductor sales revenue hit $228 billion, easily surpassing by 7 percent the previous record of $213 billion reached in 2004 and 12 percent higher than the industry's dot-com high-water mark of $204 billion in 2000.

An expanding consumer electronics market fueled the chip sales growth led by the soaring sales of MP3 players, digital cameras, USB flash drives, the ubiquitous iPod, its offspring and other digital entertainment gear.

Intel Corp., Oregon's largest employer with 15,000 workers in the Portland-Vancouver area, continues it dominance of chip suppliers with 15 percent market share and revenues of $35.1 billion last year, outpacing the market with 14 percent growth over 2004.

Samsung and Texas Instruments retain their No. 2 and No. 3 rankings, respectively. Regionally, the Asia-Pacific market was the largest, consuming $103 billion of chips in 2005.

NAND-based flash memory was one of the fastest growing segments of the chip business. These chips can be found in virtually all portable consumer electronics, and Samsung, Toshiba and Hynix all thrived in 2005 because of it. Hynix can credit its 600 percent increase in flash sales as the reason it showed up in the top 10 for the first time.

Semiconductor equipment makers did not fare as well, registering an 11 percent decline in 2005 sales to $33 billion after a gangbuster 2004, when revenues shot up 68 percent to $37 billion.

There weren't too many complaints, though, as 2005 turned out to be the third best year ever for equipment makers, according to Semiconductor Manufacturing Magazine, or SEMI.

Continued demand

SIA's 2006 forecast calls for continued strong electronics demand by consumers of all things digital, led by TVs, MP3 players, iPod-like devices and digital cameras that will push up 2006 worldwide semiconductor sales by nearly 8 percent to $246 billion.

Looking past 2006, the SIA remains bullish, with a forecast of semiconductor sales breaking $300 billion in 2008. Digital signal processors, a key component of cell phones and digital camcorders and a segment dominated by Texas Instruments, will grow the fastest (17 percent in 2006, followed closely by NAND flash.)

Backing up this optimistic three-year sales forecast by the SIA are recent announcements of significant capital investment by Intel with new 300mm fabs (factories), priced at about $4 billion each, announced for Arizona and Israel, a $650 million expansion of its Albuquerque fab and a $1.2 billion NAND flash joint venture (IM Flash Technologies) with Micron Technologies.

While Intel is well-known for its aggressive capital spending, there have been other capital spending announcements from Intel arch rival AMD, which will commence building a new fab somewhere in 2006, which is sure to cost at least $3 billion. Boise, Idaho-based Micron announced a matching contribution of $1.2 billion to the Intel NAND flash joint venture as well as Apple's pre-payment of $500 million to the joint venture to ensure a supply of NAND flash for its wildly popular iPod. Texas Instruments is expected to finish construction of a new fab in Texas in 2006.

Locally, SEH America appears to have confirmed investment plans in 2006 for its Vancouver facility, based on comments from Vancouver Mayor Royce Pollard after his recent trip to Japan.

With chip factory utilization rates continuing to stay in the 90 percent range in December, there is a high probability we'll see more announcements of capacity spending increases in 2006.

'What, me worry?'

All this capital investment is good news to semiconductor equipment manufacturers. According to the SEMI Year-End Consensus Forecast, sales of semiconductor equipment in 2006 is expected to grow at a rate of 9 percent -- to $36 billion -- with sales expectations of $40 billion and $46 billion in 2007 and 2008, respectively.

I don't want anyone to walk away with an Alfred E. Neuman "What, me worry?" attitude after reading the 2006 and beyond forecast. All of this good news may be just the reason to worry in an industry which lives by Andy Grove's mantra of "only the paranoid survive."

The semiconductor industry is sprouting gray hair, and those of us who have a few of our own know it's a battle to stay spry. Dale Ford, vice president for market intelligence for iSuppli, recently said that long-term semiconductor growth is slowing, citing industry compound annual growth rates of 28 percent in the 1978-1986 period, dropping to the 7 percent range since 1997.

So as we witness the mellowing of the semiconductor boom-and-bust cycles the industry is so well-known for, few will argue that this is an industry that is increasingly becoming more beholden to the consumer electronics market, the whims of consumer spending and the factors that affect it, namely the U.S. economy.

Dampers on consumer spending

The convergence of higher energy costs and higher interest rates that manifest themselves in the form of higher mortgage and other personal installment debt payments have historically dampened consumer spending.

No one can ignore the recent UCLA study predicting the demise of 800,000 home construction jobs nationwide due to the slowing housing market, or the massive layoffs announced at Ford and General Motors, to realize that, just maybe, we can say so long for a while to the wealth effect that has allowed Americans to spend freely (and save nothing) for the past five years.

So there is some jeopardy to this "What, me worry?" forecast.

Using history as a guide, if 2006 does turn out to be the strong industry year that is now being projected by most analysts, we could just as realistically expect a capacity glut and hopefully a mild downturn to begin sometime in 2007, replacing the current, uninterrupted upward projection. For now, we'll hope the analysts are correct.

The outlook for 2006

* Continued strong demand by consumers of all things digital, led by digital TVs, MP3 players, iPod-like devices and digital cameras, will push 2006 worldwide semiconductor sales higher by nearly 8 percent to $246 billion.

* With worldwide chip factory utilization rates continuing to stay in the 90 percent range, there is a high probability we'll see more announcements of local capacity spending increases in 2006.

* For instance, SEH America appears poised to move ahead with capital expansion plans at its Vancouver facility.

SEMICONDUCTORS: What might happen 20 years from now

In 20 years, the world's semiconductor industry will have made its move to production pf 450mm (18-inch) size wafers from today's 300mm wafers (12 inch). This transition to larger wafers will yield a tremendous cost advantage, albeit only after considerable expenditure of research and development dollars.

There will be a preponderance of second-tier semiconductor foundries due to their ability to provide niche-oriented and specialty technologies and smaller manufacturing runs to an even more specialized customer base demanding faster cycle times to meet smaller profit windows.

Semiconductor companies in 20 years will have morphed into a very different-looking corporate structure, with mergers and acquisitions bringing them together with digital-content provider companies (music, movies, photography, broadcasting, cable/satellite) to ensure markets are compatible with next-generation chip technology.

The largest regions of semiconductor consumption will have shifted from Southeast Asia to China, India, Latin America and Russia.

The nano electronics era will be upon us with new nano crystalline silicon chip structures that will dominate the industry with their ability to significantly reduce the cost of chip manufacturing due to smaller die size and fewer manufacturing steps.

The U.S. will lead the semiconductor industry and world in competitiveness, but only after a considerable struggle to influence favorable government policies in the area of R&D tax credits, capital investment, intellectual property and free markets as well as significant government and private incentives and programs to ensure an adequate supply of engineers and other high-tech workers.