The Semiconductor Industry serves as a driver, enabler and
indicator of technological progress. Developments in the industry
determine the way we work, transport ourselves, communicate,
entertain ourselves and respond to our environment. The PCs we work
on, the cars we drive, the phones we communicate with, the
electronic gadgets on which we watch movies, listen to music and
play games on, and the planes and weapons used to transport or
protect us use semiconductor devices.
As environmental issues have become more of a concern today,
semiconductor devices are being made to reduce power consumption,
reduce heat dissipation, capture solar energy, create more
efficient lighting solutions and so forth.
The past decade has seen big changes in the industry, with most
players streamlining operations and transferring more routine
production to low-cost locations. This led to the development of
the Asian market, where most memory production and backend
operations have shifted.
2011 Dampened by Natural Disasters
While 2010 benefited from pent-up demand, 2011 was expected to gain
from the growing popularity of mobile devices. However, growth in
the first half was tempered by the tsunami and earthquake in Japan,
while that in the second was affected by the flooding in Thailand.
As a result, expectations continued to trend down right through the
year. The SIA was originally looking for a growth of around 6% in
2011, which dropped a notch to 5.4% by mid-year. However, in
December, growth expectations slipped to 1.3%.
The SIA stated that the industry grew modestly in the first half
(up 3.7%), naming the corporate refresh cycle, smartphone growth,
and increased spending on IT infrastructure as the main drivers
that were partially offset by cautious consumer spending and the
disaster in Japan. Increased use of semiconductors in all
end-markets and particularly in the automotive market will drive
semiconductor sales, according to the SIA.
However, the typical second-half pickup was not strong enough,
mainly because this generally comes from back-to-school and
holiday-driven spending for consumer and mobile computing devices.
However, consumers bought less enthusiastically this year than in
past years, due to fears of the recession continuing. Second,
Europe continued to disappoint. Third, the flooding in Thailand
impacted HDD manufacturers, and the ripple effect impacted PC
manufacturers and thereby, semiconductor manufacturers.
iSuppli also cut expectations significantly from 4.6% to 2.9%.
Gartner expects 2011 sales growth of just 0.9% compared to its
previous expectation of 5.1%. Other research firms, such as VLSI,
IDC and IC Insights took down their estimates to 2.3%, 3.4% and 5%,
Computing and Consumer Markets Remain Biggest
These two end-markets together consume around 60% of total
semiconductors sold. Therefore, they have the ability to
significantly influence total sector performance.
A number of factors, in combination, are bringing about a complete
turnaround in the computing market. Although developed markets
continue to show signs of maturing, worsened by commoditization and
corresponding pricing pressures, there are some points of
encouragement as well.
) Windows 7 continues to drive sales at enterprise customers, while
Windows 8 is expected to speed up adoption of mobile devices. Even
with operating systems, such as
) Macintosh platform gaining popularity, and cloud alternatives
) Chrome coming to market, Windows 7 adoption rates have held up
Second, Apple's run of success is a big driver, since the Macintosh
OS runs on Apple devices alone, which means more hardware and
consequently, more semiconductor devices being sold. Third, with
the advent of less sophisticated and ultra mobile devices
(netbooks, tablets and now, ultrabooks), the market continues to
expand. Fourth, increased computerization in emerging markets, such
as China, India, Brazil and Russia is emerging as one of the
strongest drivers of growth in this market.
Perhaps the biggest driver of business is the growth in the data
center segment, which has increased focus on servers, storage and
networking equipment that consume semiconductors of the high-end
variety. The cost advantages of moving to the cloud are encouraging
many small and medium-sized businesses, as well as some large
organizations to transfer either a part or the whole of their
operations to the cloud. We expect this change to be a major driver
of growth for the industry in the foreseeable future.
The main negative for the computing market is the cannibalization
by tablets, which are in the nature of consumer devices with
computing functions. This is pulling down spending on core
computing (PCs, notebooks and netbooks).
With ultra-portable computing devices gaining popularity, the
distinction between consumer and computing is blurring in some
cases. Of course, the consumer electronics market also includes
other gadgets such as LCD TVs, Blu-ray players and smartphones.
The problem with this segment being a major driver of revenue is
its inherently low margins. Competition is fierce and aggressive
pricing is the rule of the day. Since semiconductors made for
consumer goods are in the nature of components, there is
ever-increasing pressure on their prices that correspondingly
The Consumer Electronics Association (
) is not very optimistic about consumer electronics sales this
year. While it expects the overall growth rate to be around 5%,
most categories are expected to slow down. Smartphones, with an
expected growth rate of 22%, are expected to save the day. Tablets
and e-readers are expected to help again this year with
double-digit growth rates.
While the CEA did not provide details for all products, it did
mention that TVs would be relatively flat this year with growth if
any expected to come from emerging markets. Approximately 50% of
TVs sold in the U.S. will be connected compared to 12% in 2011.
Consumer confidence in the U.S. economy touched bottom in the
second half of 2010, although trends indicate that the recovery is
slow and very gradual. Despite the much lower unemployment rate,
consumers remained decidedly cautious in both the 2010 and 2011
holiday seasons. An offsetting factor has been the individual
buying habits that continue to favor electronic gadgets as holiday
gifts. The trend may be expected to continue, which is a positive
for semiconductors serving the market.
Communications infrastructure spending is not likely to exceed 3-4%
this year, as carriers cut investments despite growing traffic.
While technology upgrades should continue, carrier spending in
Europe will be impacted by fears of a recession, while in the U.S.,
growth could taper off following several years of strong spending.
Chinese players are likely to keep the pressure on the pricing
Automotive chipmakers should see good growth over the next few
years. While the recession and natural disaster in Japan have
severely impacted these players in the last few years, there are
signs of growth in both the U.S. and Europe. However, we may see
some changes in days to come, since nearly a fifth of vehicle
production has moved to China and we may expect more to follow.
Perhaps the biggest driver of growth for automotive chip
manufacturers is the increasing electronic content per vehicle,
driven by the need for fuel efficiency, entertainment and automated
navigation. With electronic stability control becoming mandatory in
the U.S., there should be sustained demand for enabling devices.
Additionally, microcontrollers for engine functions and
transmission controls are becoming more popular, since they
increase the efficiency of automobiles and make them more
eco-friendly. Infineon Technologies, Renesas Electronics, Freescale
Semiconductor and Texas Instruments are the major beneficiaries
here. Linear Technologies has also increased its exposure to the
automotive segment, so it should gain from the growth in the
Medical Devices is an upcoming area and adoption of semiconductors
in this market may be expected to accelerate over time.
The aerospace and defense markets are considerably dependent on
government spending and policy making. The commercial aerospace
market (which lags an economic downturn or recovery) continues to
strengthen, as passenger and cargo traffic continue to increase.
The outlook for defense spending, on the other hand, is not as
bright. The focus on terrorist activity remains, so spending on
intelligence systems and basic weaponry is stronger. A longer-term
driver for semiconductor manufacturers is the growing importance of
electronic weaponry. So semiconductor manufacturers serving these
markets continue to see mixed results, depending on the customers
We see continued inventory rebalancing over the next few months,
which will negatively impact suppliers to the computing market.
Additionally, cannibalization of traditional computing devices
should continue through the year. Therefore, this end-market will
have a significant negative impact on the industry. Consumer
devices, such as TVs will be another area of softness.
However, other consumer devices, such as tablets and smartphones,
will consume a large number of ICs. The automotive market will be a
positive force this year.
Memory manufacturers should do well again this year, although it
will continue to be a difficult year for DRAM (currently in
oversupply). Logic should do well.
Ever Smaller & More Powerful
The demand for greater functionality in smaller and more power
efficient gadgets is leading to greater integration within the
semiconductor device. This is leading to increased demand for the
system-on-a-chip (SoC), which is a single device incorporating a
microprocessor, digital signal processor or graphics core, as well
as memory and logic.
The major players in the industry may be broadly categorized into
chipmakers (OEMs-whether fabless or otherwise), equipment and
material suppliers, and foundries.
According to preliminary estimates from IHS iSuppli,
) and Samsung remained the top two semiconductor suppliers in 2011,
) overtook Toshiba Corp. to attain the number three position
(helped by the National Semiconductor acquisition).
Renesas remained at number 5, followed by
), which moved up from the ninth position in 2010.
) remained at number 7, with Hynix,
) in the eighth, ninth and tenth positions.
Applied Micro Devices
) crept up from number 12 to number 11.
Gartner estimates that semiconductor equipment sales by the top ten
suppliers increased 2% in 2010, following a 38% decline in 2009,
accounting for 63.4% of total equipment sales. The overall
equipment market is estimated to have increased 143% to around $41
billion in 2010. Automated test equipment (
) was the strongest segment (up 149%), wafer fab equipment (WFE)
was close behind with a growth rate of 145%, while packaging
assembly equipment (PAE) was third, having grown 127%.
The very strong growth may be traced to a particularly weak 2009,
when the recession impacted demand for semiconductors and capital
spending was minimized. In this environment also,
) easily maintained its number one position, followed by
ASML Holdings N.V.
) and Tokyo Electron Ltd in that order.
Lam Research Corp
) Nikon and
Novellus Systems, Inc.
) were the others in the top 10.
The 2011 estimates are not available yet. Exposure to the solar
market and acquisitions will account for most of the changes in the
The Foundry segment has undergone significant changes over the past
few years and the top five positions have changed again, according
to research from IC Insights. Although
Taiwan Semiconductor Manufacturing Company
) remains the leader by far, followed by Taiwan-based
United Microelectronics Corp
), GlobalFoundries has now taken the third position in the pureplay
segment, pushing the Chinese foundry
Semiconductor Manufacturing International Corp
) to the fourth position.
Also, specialty foundry
) has jumped to the fifth position. A few clear leaders are
emerging in the foundry segment - Taiwan Semiconductor at the
trailing edge, GlobalFoundries at the leading edge and Tower
Semiconductor in the specialty category (analog). Additionally,
Intel and Texas Instruments' foundries make them two strong
contenders with leading edge capabilities.
Manufacturing digital ICs is expensive, as it requires
state-of-the-art technology and processes. On the other hand,
digital products are cheaper, so cost recovery is more difficult.
This has led to specialization in the industry and a greater
contribution from Asian manufacturers. However, a significant
portion of the intellectual property remains with the domestic
One of the primary beneficiaries of the growth in mobile phones,
tablets and the like is
), with its power-efficient low-performance chip architecture that
dominates the growing mobile phone and tablet markets. With new
versions of ARM chips coming to market, it is likely that the chips
will gradually spread to the server segment as well (probably not a
Others would be Qualcomm, Samsung and Texas Instruments, all of
which are big semiconductor manufacturers that also use ARM
architecture. As such, we remain relatively positive about these
companies in 2012.
We are also optimistic about Intel and AMD, given their focus on
the data center segment. Although we are a wee bit cautious on
Intel's growth initiatives in mobile and believe that execution
will be key to delivering on its plans. The company's market
position, cash balance, technology lead, and management strategy
and execution are positives in our opinion.
AMD is also worth watching, as management has been delivering on
its promises. Moreover, the company is seeing some real success in
its graphics business, which should complement initiatives targeted
at rationalizing its debt, increasing focus on R&D and
operation of a lower-cost model.
The analog and mixed-signal market is dependent on innovation.
Consequently, these products generate higher margins than digital
products. They are also more customized and have longer life
cycles. These advantages are not lost on U.S. players, so the
number of companies entering the market is on the rise.
Our favorites in this area include Texas Instruments,
). Also, while some companies, such as
Maxim Integrated Products
) will have mixed performances given their varied dependence on the
auto market, they are, for the most part, highly diversified,
Linear and Maxim have also reduced their dependence on the
computing market, which we see as a positive in the near term. We
believe these companies will generate moderate growth in 2012.
We believe that 2012 will be a transitional year, with inventory
rebalancing and adjustment. Given the uncertainties in demand, we
think that semiconductor manufacturers will curtail investment in
capacity although technology purchases could continue. DRAM
inventory remains in excess although NAND and NOR are slightly
In this environment, we would avoid investment in equipment
companies, such as Applied Materials, KLA-Tencor, Lam Research,
etc. We particularly discourage investment in Applied Materials at
this time because of its exposure to solar, where there is
significant oversupply and resultant pricing pressure.
The foundry segment will also have a moderate year (at best). The
Thailand flooding and resultant weakness in the PC market and soft
consumer spending increases risks in our opinion. We therefore
continue to believe that investors should treat foundries, such as
Taiwan Semiconductor, United Microelectronics, and Semiconductor
Manufacturing International with caution.
We also remain cautious about companies with relatively weak
financials, such as
). For instance, FORM continues to burn cash despite the relatively
strong demand for its specialized probe cards. It also has
significant customer and market concentration that increase
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