Judging the health of an industry can be complex. For the
semiconductor industry, one indicator is the amount of
manufacturing equipment sold, which fell by 37% year-over-year in
North America for the month of May.
While some market research companies had been expecting sales to
pick up in the second half of the year, there are macro-economic
issues at play that suggest otherwise.
Industry association Semiconductor Equipment and Materials
International (SEMI)
reported last week that
orders for semiconductor manufacturing
equipment continued sliding downward,
approaching levels seen in 2005 - the last time the semiconductor
industry reported a year-over-year decline - as North America-based
providers of semiconductor manufacturing equipment posting $1.03
billion in orders in May on a three-month average basis.
Christopher Danely, managing director, senior analyst and global
coordinator for semiconductors at JP Morgan
said earlier this month at the Churchill Club's 12th Annual
Semiconductor Forecast that he believes the worst is over.
"Multiples have come down because stockholders realize growth in
the industry is slower," he said.
Danely reminded that semiconductor industry revenue grew at a
9-year CAGR of 13% between 1990 and 1999, but growth has since
slowed to a 5-year CAGR of 10% between 2003 and 2008 (estimated).
Comparatively, the US GDP grew at a CAGR of 5.3% between 1990 and
1999, and 4.9% between 2003 and 2008 (estimated).
Between 1995 and 2008 (estimated), semiconductor industry
revenue grew at a 13-year CAGR of 5%, while the US GDP grew at a
CAGR of 5.1%.
On a unit basis, semiconductor industry units have grown at a
9-year CAGR of 9% between 1990 and 1999 and have accelerated to a
5-year CAGR of 11% between 2003 and 2008 due to increasing
semiconductor apps in consumer electronics. At the same time, ASPs
rose at a 9-year CAGR of 3% between 1990 and 1999 but have declined
at a 5-year CAGR of -1% between 2008 and 2008 mainly due to pricing
pressures from the consumer end market.
As such, Danely expects lower, but still good, growth for the
industry.
Interestingly, he also believes semiconductor companies should
be run more like "normal" companies [i.e. Philip Morris] and less
like growth companies [ala Google]. Specifically, changes are
needed in order to create shareholder value, namely more dividends,
less operating expenses, and increased focus on cash
management.
Although he believes the worst is over, he acknowledged that it
is hard to get excited as demand is lacklustre. Coupled with that,
margins are not attractive but valuation is seen to be OK for 2009.
While inventory is no longer excessive, it is definitely not too
low either - all of which boils down to another year of so-so
returns, Danely concluded.
Speaking of demand, during the same Churchill Club event, Dan
Niles, CEO of
Neuberger Berman
Technology Management, a subsidiary of Lehman
Brothers, asserted that a true picture of end user demand for the
year is not clear, making it is difficult to rely on forecasts.
While the government stimulus checks are boosting consumption,
once they are spent, the picture will be clearer as to what
consumer spending may be. Because of this, Niles said there is
reason to worry about a recession occurring late this year or early
next year.
Compounding matters of a murky demand picture is the
skyrocketing price-per-barrel of oil, higher food and consumer
goods prices due to rises in transportation costs and, of course,
the housing crisis. "The inventory of unsold homes is the
underpinning of all the problems we're having," Niles noted.
Add to that income volatility, which leads to economic
insecurity and the consumer sentiment index falls.
The global economic environment comes into play as well. As
economic growth stalls around the world, semiconductor growth will
stall as well, he said.
Niles also observed that emerging markets are not doing as well
as expected, and pointed to PC makers Acer and Lenovo, both of
which posted less than stellar Q1 financial results.
In addition, the handset market in China is slowing, according
to Longbow Research
semiconductor analyst Tayyib Shah, based on a June survey of mobile
phone retailers in the US and China that shows the US market rising
and the Chinese market flattening.
"China's flat month-over-month sales number is a sign of
weakness in that growing market which had seen near double-digit
sequential. In the US the average was driven up by a number of
contacts at Best Buy who reported a month-over-month sales increase
of over 25%. If we strip out the numbers reported by our Best Buy
contacts, the remaining US contacts reported a 3% month-over-month
increase in sales," Shah offered, in a statement.
Shah said these trends support the 2% quarter-over-quarter
decline in National Semiconductor's handset revenues that he is
projecting for the company's fiscal Q1 2009 (ending August).
The handset trends in China are attributed to macroeconomic
concerns over a slowing economy, a high inflation rate, and the
recent earthquake. In addition, China shortened its May Labour Day
holidays to three days this year from seven days last year, which
Shah believes dampened handset sales.
As if that weren't enough, last Friday, the Dow Jones Industrial
Average dropped more than 200 points, tamped down by another steep
decline in financial shares and a big rebound in crude-oil prices,
according to the Wall Street Journal. Trading ended below the 12000
mark for the first time since March 17.
In the end, there is no way to know how 2008 will wrap up for
the semiconductor industry until a clear picture of consumer demand
can be had - since that segment drives so much of the industry's
activities. One thing is for sure, the industry is in for a bumpy
ride until then, with conditions likely to get worse before
eventually improving.
While all the bad news can get oppressive, thankfully during the
Churchill Club event, Sangeeth Peruri, managing director of
J. & W. Seligman &
Co. reminded that the great thing about the
semiconductor industry is Moore's Law, which drives constant
innovation and new opportunities for growth.
By Ann Steffora Mutschler, Senior Editor - Electronic Business