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.
2011: Year of Challenges
Starting with the earthquake and Tsunami in Japan and moving on to
the flooding in Thailand, the industry suffered huge setbacks in
2011. Additionally, the challenges came not just from natural
disasters, but also from a generally weak global economy
(especially in Europe) and sagging consumer confidence.
Global sales of semiconductor devices touched $299.5 billion for
the year, increasing 0.4% from 2010, when revenues were up 31.8%.
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).
Computing, Consumer Markets Remain Biggest Drivers
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. The near-term outlook is bleak
for semiconductor manufacturers, with IHS iSuppli expecting sales
to decline 1.9% this year.
The enterprise side of the business is relatively stronger, as
) Windows 7 continues to drive sales at enterprise customers, with
Windows 8 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
relatively well. New products, such as Ivy Bridge and Romley from
) are also contributing to growth in the enterprise segment.
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
high-end variety. 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 foreseeable future.
Consumer spending on computing devices remains cautious however.
Despite the host of less sophisticated and ultra-mobile devices
(netbooks, tablets and ultrabooks), growth in the back half of 2012
is tracking below expectations.
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 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 5.9% 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. HIS 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 have 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% this 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 as
bright. Moreover, the focus on terrorist activity remains, so
spending on intelligence systems and basic weaponry remains 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.
Forecast for 2012
Semiconductor sales in the first half of 2012 remained below the
level generated in the first half of 2011.
Overall, the 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 down
3.5%. 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, Intel and Samsung remained
the top two semiconductor suppliers in 2011, while
) 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 the 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, spending on which was averted to an extent in the current
cycle through the use of superior technology.
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
(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 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.
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 (not a 2012
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, given its successful new
product ramps and focus on the data center segment. Although we
remain cautious about
) 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 positives in our opinion.
Analog companies with a focus on the communications, industrial and
automotive segments, such as Analog Devices,
), as well as well-diversified companies such as
) may be expected to hold up better than others 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 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, with the
weaker-than-expected demand for mobile devices dampening growth
prospects in the second half of the year. We therefore continue to
believe that investors should treat foundries, such as Taiwan
Semiconductor, United Microelectronics, and Semiconductor
Manufacturing International with caution.
Texas Instruments 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).
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