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.
However, since innovation remains largely within the country,
the sector is one of the biggest employers of labor, with a
corresponding significant impact on the overall economy.
End Market Drivers
The computing and consumer end markets together consume around
60% of total semiconductors sold. Therefore, they have a
significant influence on total sector performance.
A number of factors, in combination, are bringing about a
complete turnaround in the computing market. The near-term
outlook is bleak for semiconductor manufacturers, with IHS
iSuppli expecting sales to decline 1.9% this year. The negatives
(tablet cannibalization, weaker-than-expected spending by both
consumers and enterprises) are outweighing the positives (cloud
computing, Windows 8) for now but things are expected to get
better next year.
Emerging Markets, such as China, India, Brazil and Russia remain
a positive for sector growth. However, this growth is coming at
the cost of profits because of poorer purchasing power in these
regions. Additionally, the macro weakness in developed regions is
also impacting certain emerging markets.
With ultra-portable computing devices gaining popularity, the
distinction between consumer and computing markets is blurring in
some cases. Of course, the consumer electronics market also
includes other gadgets such as LCD TVs, Blu-ray players and
The Consumer Electronics Association ("CEA") expects global
consumer electronics sales to be up 5.9% this year, driven by
growth in tablets (up 83% from 2011), smartphones (up 24%),
networked-enabled TVs (20%) and 3D-enabled displays (75%). A
growing number of consumer electronic devices are now being sold
into /factory-installed on automobiles.
IHS iSuppli is very positive about semiconductor sales into the
communications market and expects both the wireless and wireline
segments to make a positive contribution. Wireless is expected to
be the stronger of the two, increasing 10.4%, with wireline
relatively flat at 0.7%. Increasing data volumes across the world
and infrastructure build-outs in emerging regions are positive
Industrial consumption of semiconductors is expected to be one of
the strongest this year, driven by the need for production
efficiencies, which in turn is increasing demand for power
management semiconductor solutions. IHS iSuppli expects
semiconductors for industrial applications to be up 7.7% this
year, just slightly short of the 9.3% growth in 2011.
Medical Devices (normally included in this segment) is an
emerging area where semiconductor usage continues to increase.
The automotive end market is an emerging area for semiconductors.
The growing electronic content within this market is a secular
trend, as demand for safety, infotainment, navigation and fuel
efficiency continue to increase. As a result, semiconductors
serving this market should grow stronger than the industry over
the next few years, although, 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.
While 2012 started off well, conditions deteriorated for
suppliers somewhat because of the protracted weakness in Europe
and sluggish recovery in the U.S. Therefore, IHS iSuppli expects
the market to grow just 2.7% for the full year, down from the
10.0% growth recorded in 2011.
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) has started
looking up. Production increases should be slightly positive for
the semiconductor industry this year.
The outlook for defense spending on the other hand is not
encouraging, with focus remaining on intelligence systems and
basic weaponry. Electronic weaponry remains a bright spot. So
semiconductor manufacturers serving these markets continue to see
mixed results, depending on the customers served.
Forecast for the Full Year
Semiconductor sales in the first half of 2012 remained below the
level generated in the first half of 2011.
Overall, Semiconductor Industry Association (SIA) projections
(based on WSTS data) places worldwide semiconductor sales growth
at 0.4% in 2012 and 7.2% in 2013. The Americas region is expected
to be up 3.2% in 2012, Japan 1.7%, Asia/Pacific 0.1% and Europe
IHS iSuppi is even more negative about growth this year,
expecting the PC market slowdown to result in a 0.1% decline in
The major players in the industry may be categorized into
chipmakers (OEMs-whether fabless or otherwise), equipment and
material suppliers and foundries.
According to estimates from IHS iSuppli,
) and Samsung remained the top two semiconductor suppliers in
) 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, Micron Technologies (
) in the eighth, ninth and tenth positions, respectively.
Applied Micro Devices
) crept up from number 12 to number 11.
Gartner estimates that spending on semiconductor capital
equipment increased 13.7% in 2011, on top of the 118.4% increase
in 2010. The increase was almost totally driven by wafer fab
equipment ("WFE"), with other segments declining
However, the research firm expects the equipment market to
decline 19.5% to around $52 billion in 2012, growing 19.2% the
following year. The decline is expected to be across all
segments, with WFE declining 22.9%, automated test equipment
("ATE") declining 16.5% and packaging assembly equipment ("PAE")
SEMI estimates are slightly different. The research firm expects
semiconductor equipment sales to decline 10.8% this year,
following a 4.7% increase in 2011. The research firm expects all
geographies except South Korea to decline in 2012 and rebound
thereafter in 2013.
The increased spending on technology upgrades during 2011
resulted in sufficient capacity for 2012 and 2013. However, the
growing demand for semiconductors is likely to encourage the next
wave of spending some time in 2013. At that time, we are likely
to see some new fabs, spending on which was averted to an extent
in the current cycle through the use of superior technology.
Latest research from VLSI shows that
) surpassed Applied Materials (
) to attain the number one spot in 2011. This was possible
because of increased spending on lithography tools during the
year. Therefore, while the top 15 equipment suppliers grew just
13%, ASML and Nikkon (another supplier of lithography tools)
together grew 27%. Tokyo Electron,
) occupied the next three positions, respectively.
However, the story could change again in 2012, because of
consolidation in the market. This year, Applied will include
Varian (number 13 from 10 months as an independent company in
2011), Lam will include Novellus (number 10 in 2011) and
Advantest (number 8) will include a full year of Verigy.
The pureplay Foundry segment has undergone significant changes
over the past few years although the top five positions have not
changed much, according to research from Gartner.
Taiwan Semiconductor Manufacturing Company
) remains the leader by far, followed by Taiwan-based
United Microelectronics Corp
). GlobalFoundries remains at number three, with Chinese foundry
Semiconductor Manufacturing International Corp
) at number four. The only change was with respect to specialty
), which displaced Dongbu Hi-Tech to jump 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.
One of the primary beneficiaries of the growth in mobile phones,
tablets and the like is
), with its power-efficient, low-performance chip architecture.
With new versions of ARM chips coming to market, it is likely
that the chips will gradually spread to the server segment as
well (not a 2012 phenomenon). Others would be
), Samsung and Texas Instruments, all of which are big
semiconductor manufacturers that use ARM architecture.
Although we remain cautious about Intel's growth initiatives in
mobile and believe that the macro situation remains a deterrent
to Ultrabook sales, the company's market position, cash balance,
technology lead, and management strategy and execution are
Analog companies with a focus on the communications, mobile and
networking technologies such as
) may be expected to hold up better than others in the next few
The largest foundry, Taiwan Semiconductor is also likely to do
well and valuation is attractive. Additionally, the patent war
) and Samsung may have Apple moving production to another foundry
and Taiwan Semiconductor could be the beneficiary.
We believe that inventory rebalancing and adjustment continue to
date. Given the uncertainties in demand, we think that
semiconductor manufacturers will curtail investment in capacity
although technology purchases could continue. In this
environment, we would avoid investment in equipment companies,
such as Applied Materials, KLA-Tencor, Lam Research, etc.
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