Allocation, rationing, higher prices and a fight for wafers are the inevitable fate of the semiconductor industry next year, according to Malcolm Penn, CEO of Future Horizons, speaking at his company's mid-term forecast meeting, IFS2008-MT, in London today.

"The shortage of capacity in 2009 is inevitable", said Penn, "there's nothing you can do about it. There will be wafer allocation, there will be price increases, people will have to fight for wafers - the fabless and the start-ups companies will be fighting for wafers alongside the IDMs."

"The penny will drop, but too late to invest in new capacity", said Penn, "for God's sake bring back some chip-savvy CEOs into this business who appreciate that revenues and profits don't come from massaging the balance sheet, but by doing the job right. MOS capacity is only growing by one per cent per quarter, and needs to be growing by three per cent per quarter. They should be spending on new capacity now. The mismatch will be huge in the second half of next year."

Capex as a ratio of sales has fallen to the lowest level the industry has ever seen. The reason is that the industry is being run by CFOs for one thing - profit.

Currently, the semiconductor industry has become the puppet of the OEMs, with demand changing in a matter of days while planning supply has to be planned and executed over months.

"The chip companies have become the puppets of the OEMs, "the customers no longer give orders they give commitments, and those can be cancelled a day or two before they're due to be delivered."

"Companies play games with suppliers, they build boxes so they can slot in a competitor", added Penn.

The anomaly of the semiconductor industry today is that capacity utilization is very high while capex is very low.

"The industry's saying: 'I've got too little capacity, say under 2 per cent growth so I'm stopping investing in new capacity'", said Penn. Asked why? Penn replied: "Because the industry is fed up with selling capacity too cheap."

Demand, in terms of unit volumes keeps increasing, as it always does. "There have only been two years of negative unit growth - 2001 and 1985", said Penn.

Future Horizons has a forecast of 10 per cent for semiconductor industry growth this year. The consensus among the leading analysts is around 4.5 per cent.

Gartner Dataquest is saying 4.6 per cent; iSuppli is saying 4 per cent; the SIA is at 4.3 per cent; WSTS at 4.7 per cent and IC Insights at 7 per cent.

"We can't make it much less than 7 per cent growth this year", said Penn, "and the balance of probability is in the 10 per cent region."

Even if Q2 is catastrophic, say well under 2 per cent growth, and no one is saying they expect that, Future Horizons is expecting big Q3 growth, at around 14 per cent, and Q4 growth of 6 per cent.

Penn pointed out that no forecasting organization, and no country anywhere in the world is forecasting GDP recession this year. The IMF is expecting world economic growth of 3.7 per cent this year and 3.8 per cent in 2009. India, China and South-East Asia are making up for the slower growth of the West.

"The new economies are growing at the expense of the old economies", concluded Penn, adding, "this is not a world which is falling apart. It's a world which is in quite good shape."

See also: Mannerisms, the blog of David Manners. Updated twice daily, it's the distinctive, entertaining, authoritative and never dull commentary on the semiconductor industry, from someone who knows. Sign up for the Mannerisms eNewsletter.