Fred Ramberg's  Instablog

Pilots have a term for a deadly situation where conventional options only make things worse - adding power, raising the nose - all drive the airplane in to the ground.  They call this "coffin corner."

Many commodity chip makers currently find themselves in this situation.  Pricing pressure, demand, and even technolgy advances have conspired to make them unprofitable - at best.

The most visible battleground is in memory chips where technolgy has allowed the supply to more than double in the last 12 months without an increase in the number of wafers run through the process tools.  This, when added to the decline in demand and pressure to drop prices has led to bankruptcy - Qimonda, and boat loads of red ink for other makers.  Samsung always seems to Marshall on, balancing their unprofitable segemnts against their profitable ones.  Micron, on the other hand seems to have to go to the well every few years for some form of bail-out (partnerships, loans, partner-stakeholders, etc).  Despite the stiff-upper-lip attitude displayed on the earnings call, such might have to be the case soon.

Having been in the semi business for some 20 years, I can say that the indicator of a true cyclic upturn is a rapid decline in device pricing (as OEMs are able to get leverage by placing large orders) not stabilizing or increasing prices.  The good news is that stabilized or increased prices indicate an inflection point where inventory issues have calmed (neither building or burning) and demand is served by wafer start levels with little buffer.

So, the buffers (distributors, CMs, etc) are likely at their bottom.  When the trend turns up from the inflection point, business levels build here first as buffers are again required to meet increasing forecasts.

I hold no position in any companies mentioned.

Raw device consumption likely reached its low in 2Q09 as inventory (some of it a year or more old) was finally burned off.  Current consumption likely tracks end demand for products with semiconductor content.  This is not a sign of a broad upturn - the demand for products has likely been trending flat to down, it is a sign that IC suppliers are now being called upon to supply devices rather than OEMs, Contract Manufacturers, and Distributors burning off inventory.

This is a situation that will bring IC manufacturing back to a level that reflects consumption.  It has been referred to as "bouncing along the bottom."  It is more significant than this; it is an inflection point from which demand will increase or decrease based upon macro-trends and product sales will be tied more closely to device manufacture due to the reduction of inventory buffer.

Some bad things creep in during this close coupled business model.  IC prices generally go up, and this is currently the case.  Materials costs, such as that for gold have gone up and shortages are being experienced in other areas.  This is tough for IC makers that need to attract business or at least maintain share - they must chose between lower margin and lower revenue.

Hit particularly hard are the semi equipment makers.  Technology advancement is not a friend to them at this point.  IC makers continue to reduce the feature size at which they produce devices getting more parts per wafer. (the shrink from 130nm to 90nm, slightly more than doubles the parts produced)  So, even at trailing edge nodes where makers need to spend little on equipment to achieve the shirk, technology is increasing output much faster than demand is taking up the supply.

In the United States, consumer electronics account for more than 75% of IC consumption by units.  And, worldwide consumer electronics is the largest growth segment for IC.  PC, handset, home electronics, white box appliance, automotive, and gaming are significant consumers and carefully tracked for unit shipments.  Though forecasts are for measurable growth in the US during 2H09, OEM makers are currently gearing up for significant growth (20% +) in only one of these markets domestically.  China, due largely to lack of market saturation, is forecasting significant growth in nearly all of the tracked segments with handset and PC leading the way.

The overall sentiment is that this is as low as it goes.  The question now is when the IC makers can return to profitability.  This is very likely further in the future than current popular thought places it.