Semi Industry Continues to Underestimate Supply/Demand Imbalance

The Semiconductor Industry Association [SIA] recently released its latest global sales report, which shows 9% year/year growth in semiconductor sales. Unfortunately, this growth rate is far slower than the 68% growth indicated for semiconductor equipment, which suggests the supply/demand imbalance will worsen.

According to DigiTimes, AMD is planning for more price cuts for its notebook CPUs on October 23 following revised price cuts for its CPU offerings on July 24.

Despite a slow start to the PC market’s high season, PC-related chip designers still expect that orders from OEM clients will rise significantly in September, driving shipments up 20% for the third quarter, industry sources indicated. (Keep dreaming.)

The big-money analysts have tallied up the numbers, and finally come to the realization there will be too much capacity. Hmm, where have we heard that before?

Strategic Marketing Associates [SMA] forecasts 35 new wafer fabs will begin to ramp the industry’s monthly capacity to a new high in 2007 as most of the new fabs that began construction from 2004 will come online in 2007, and they will be joined by 8 of the 11 fabs that just began construction in the second quarter of 2006.

SMA indicated that all of the new fabs coming online in 2007 will have the capacity to produce up to 2 million 8-inch equivalent wafers, representing about 17% of the industry’s current total capacity. The research firm highlighted that the capacity expansion will bring growth opportunities as well as the risk of overcapacity, especially in the memory arena.

The fully equipped value of the 35 new fabs is expected to reach US$56 billion over the next two to three years as these fabs will continue purchasing equipment to support their respective ramps to full capacity. Up to 60% of the newly added capacity is expected to be allocated for memory, specifically DRAM and flash memory chips, SMA detailed.

We ran into this DigiTimes article (New solar cell makers placing orders for equipment) and thought for a second that we may be off base on our supply/demand theory. Then we read the article and found that the solar cell companies in question have less than $50 million combined total capitalization. They aren’t distorting anything.

We have said a slowdown in handsets could be showing up, which could short-circuit what strength remains in chips. According to Strategy Analystics:

Worldwide mobile phone shipments grew 26 percent year-over-year, to reach 235 million units in the second quarter of 2006, according to research from Strategy Analytics. Nokia (NOK) and Motorola (MOT) dominated sales and accounted for a record 55 percent combined market share during the quarter. As of this posting, Strategy Analytics is maintaining its global mobile phone forecast of 1.00 billion units for the full-year 2006.

Comments

[Jos Versteeg:]

I wonder if it makes sense to compare worldwide semiconductor sales (+9%) to only North America Semiconductor Making Equipment Sales (+68%).

2006 Aug 15 07:20 AM

[William Trent_:]

Good point. Furthermore, I am comparing it to North American <i>orders.</i... As such, there are two reasons to doubt the validity of the comparison. Here is my rationale:

1) I use orders for semiconductor equipment rather than sales because I believe the market looks ahead, and orders are a good indicator for future sales (until they start getting canceled.)
2) I use North American orders for two reasons: first, they are provided on a more timely basis (1 month ahead of the global data provided by the SEAJ); second, they are easier (for me, at least) to access.

Using North American data involves an implicit assumption that North American semi equipment makers will approximately maintain their market share. Though this may or may not hold it can be validated on a delayed basis through the SEAJ global report. actually shows that global orders are up 90% (i.e. US manufacturers are losing share) and the situation is therefore worse than I originally painted it. I didn't even bother mentioning this in a post because I figured the way it was painted was bad enough already.

2006 Aug 15 08:28 AM