Sales Glut All But Guaranteed As Semi Supply Continues to Outpace Demand

The Semiconductor Industry Association (SIA) released its global sales report for the month of April, 2006. The report's headline, as would be expected, put the best foot forward.

April Semiconductor Sales up 8.1 Percent from 2005

The report continued:

Wireless handsets drive strong analog product sales

Worldwide sales of semiconductors of $19.6 billion in April were 8.1 percent higher than in April of 2005 when global sales were $18.1 billion, the Semiconductor Industry Association [SIA] reported today. SIA reported a nominal decline of 0.4 percent from March, when total sales were $19.7 billion.

Now, we have said in the past that we prefer year/year comparisons to the more volatile and frequently less meaningful sequential data. So we don’t have any particular fault with highlighting that number rather than the modest sequential decline. Furthermore, 8.1 percent would be considered swell for most industries.

But this is semiconductors. Aren’t they supposed to grow at 20 percent plus annually? Indeed, looking at a chart of year/year growth since 1998 shows that to frequently be the case.

Semi yr-yr chart:

Again, the source data for the chart came from the SIA. The chart gives us some interesting insight. The first is that last July, the year/year growth bottomed at zero percent. Since it never turned negative, we are now approaching the fourth anniversary of solid semiconductor growth.

The industry’s historic cyclicality may be smoothing out, which is probably a result of both its maturity and the growing shift toward the foundry model. One foundry can add capacity at a more stable pace than an industry full of companies operating their own fabs.

But alas, the orders for semiconductor manufacturing equipment tell a different story. We believe these orders are an indicator of future semiconductor supply and they grew by more than 60 percent in April. For four consecutive months they have been running at a faster rate than end demand for semis, and the spread keeps widening. 60 percent growth in supply against 8 percent growth in demand is likely to lead to a glut and significant price declines in the not-too-distant future.