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Over the holiday weekend the Semiconductor Industry Association [SIA] released data showing that year/year sales growth improved from 8.2 percent in April to 9.4 percent in May.

“Worldwide sales of semiconductors in May continued to reflect generally favorable worldwide economic conditions,” said SIA President George Scalise. “As consumer products drive an increasing proportion of microchip sales, the growth of the semiconductor industry more closely reflects overall economic growth. Sales of cell phones and other consumer electronics products once again were the principal contributors to growth in semiconductor sales. Sales of analog chips grew by 21.5 percent from May of 2005, while digital signal processor (DSP) sales grew by 13.7 percent.” Analog devices and DSP chips are important components of cell phones.

“Strong growth in sales of NOR flash memory products and optoelectronic devices are indicators of continued growth in sales of digital cameras and cell phones. Unit sales of personal computers have continued to run ahead of expectations, contributing to 13.7 percent year-on-year growth in sales of DRAMs. Sales of PC microprocessors declined by 2 percent from May of 2005, reflecting both robust competition and some inventory corrections in this major market segment. Consumers continue to benefit from this competition, as the average selling price for a notebook computer has fallen below $1,000 for the first time ever,” Scalise said.

In June the SIA raised its forecast for 2006 worldwide sales growth from 7.9 percent to 9.8 percent. “We expect to see global semiconductor sales running 9 to 10 percent ahead of last year’s pace for the next several months. End market demand, inventory levels, and capacity utilization all indicate generally favorable conditions for the industry,” Scalise concluded.

Nine- to 10-percent growth is quite acceptable. However, as we have pointed out repeatedly, orders for semiconductor manufacturing equipment are growing at a far faster pace (62 percent in May). Since this equipment will eventually be used to make more semiconductors the favorable inventory and capacity utilization levels are likely to be lost. This, in turn, will lead to additional price cuts that will make a $1,000 notebook look expensive. With signs that wireless, the recent growth driver, is slowing, there could be even more trouble ahead.

We remain concerned that the approximately 20 percent drop in the Philadelphia Semiconductor Index (SOX) from recent highs is not sufficient to correct for coming market imbalances.

Source: Semiconductor Data Shows a Continuing Oversupply