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 has 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.
2011: A Year of Challenges
From the earthquake and Tsunami in Japan to the flooding in
Thailand, the industry suffered huge setbacks in 2011. The
challenges came not just from natural disasters, but also from a
generally weak global economy (especially in Europe) and sagging
Global sales of semiconductor devices touched $299.5 billion for
the year, increasing 0.4% from 2010, when revenues were up 31.8%.
The SIA was originally looking for 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%, though actual growth was even
short of these expectations.
The primary segments responsible for the slight increase from the
prior year were optoelectronics (used to improve energy efficiency
in mobile devices and cameras); sensors and actuators (used to
improve safety and efficiency in consumer electronics, medical
devices and automotive systems, as well as smartphones, tablets and
other consumer electronic devices); and microprocessors (used
predominantly in computing devices).
The SIA stated that sales should be more or less steady for another
quarter and strengthen thereafter. However, macro concerns may be
expected to continue.
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 are bringing about a complete turnaround in the
computing market. Gone are the days when component suppliers were
limited by a maturing market, worsened by commoditization and
corresponding pricing pressures.
) 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, and cloud alternatives such as
) 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 are also helping growth.
Perhaps the biggest driver of business is the growth in the data
center segment, which is currently being driven by the move to
cloud computing. The segment has increased focus on servers,
storage and networking equipment that consume semiconductors of the
Cost advantages 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
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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 ("CEA") expects global
consumer electronics sales to be up 5% this year, driven by
strength in emerging Asia/Pacific countries (to grow 18%), Middle
East and Africa (11%), Latin America (11%) and Central/Eastern
Europe (9%). North America is expected to be flat, while both
developed Asia/Pacific countries and Western Europe are expected to
decline. The products expected to drive this growth are tablets (up
59%), smartphones (22%), home audio (5%) and mobile PCs (3%).
Communications infrastructure spending is currently being driven by
China and India. The SIA expects infrastructure spending in these
geographies to remain the major driver of semiconductor sales. The
domestic market will be driven by increasing data volumes.
Medical Devices is an upcoming area, and semiconductors targeted at
this market are beginning to do well.
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.
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 to
look up, given the increasing passenger and cargo traffic.
Production increases should be a positive for the semiconductor
The outlook for defense spending, on the other hand, is not as
bright. Moreover, the focus on terrorist activity remains, so
spending on intelligence systems and basic weaponry is still
strong. 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 served.
Given the end markets driving the current strength in the industry,
we believe that manufacturers of flash memory (particularly NAND
and also NOR) will continue to see strong demand (although
temporary periods of over-supply will impact sales). DRAM is likely
to see another difficult year, while logic sees improvement.
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.
Within SoCs, both application-specific integrated circuits (ASICs)
and application specific standard products are expected to do well
(ASICs are usually customized for a single buyer, while ASSPs may
have multiple buyers).
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 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, 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 a 118.4% increase in 2010. The
increase was almost totally driven by wafer fab equipment ("WFE"),
with other segments declining mid-single-digits.
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 -- WFE
declining 22.9%, automated test equipment ("ATE") declining 16.5%
and packaging assembly equipment ("PAE") declining 13.5%.
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
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, which were averted to an extent in the current cycle
through the use of superior technology.
Moreover, given that the growth in mobile computing and consumer
electronic devices is likely to outpace growth in all other
semiconductor applications, memory manufacturing capacity should
increase the most.
Latest research from VLSI shows that
) 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
(currently number 13 from 10 months as an independent company in
2011), Lam will merge with
) (currently number 10) 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 in the third position that it obtained
in 2010, pushing the Chinese foundry
Semiconductor Manufacturing International Corp
) to 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.
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
), Samsung and Texas Instruments, all of which are big
semiconductor manufacturers that use ARM architecture. As such, we
remain relatively positive about Samsung and Qualcomm in 2012.
We are also optimistic about Intel and AMD, given their new product
ramps and focus on the data center segment. Although we are a wee
bit cautious about 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
Most of these companies are seeing somewhat stronger demand right
now, although there are some issues based lingering effects of the
Thailand floods and economic sluggishness. We are particularly
), given its recent deal wins, product cycles, order rebound and
position in the communications market.
), which has a focus on the automotive end market that should do
well this year, or
Maxim Integrated Products
), which are expected to benefit from growth trends in the
computing end market.
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 the flash market is slightly
In this environment, we would avoid investment in equipment
companies, such as
), 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, although the
second half should be somewhat better. We therefore continue to
believe that investors should treat foundries, such as
Semiconductor Manufacturing International
) with caution.
We have turned more cautious about Analog Devices, given that
nearly half its revenue comes from the industrial market, which
) is also expected to have its own share of problems. The top line
will continue to be impacted by the phasing out of the baseband
business and it is now saddled with extra capacity that will most
likely be under-utilized until demand increases significantly (not
expected until 2013).