Given the current state of the western consumer economy and the lacklustre nature of some of the most important launches of 2012, there does not seem, at first, to be much cause for alarm about obtaining reliable supplies of silicon for the next year at least.
“The launch of Windows 8 felt like a damp squib. The iPhone 5 didn’t really take off,” said Malcolm Penn, president and CEO of market analyst firm Future Horizons at the company’s semi-annual forecast seminar in London, UK this week.
Lack of demand now could turn into a definite shortage within a year.
“Industry as far as we can tell has cut back really steeply. There is not a lot more to cut. The whole world from an industrial point of view is really running on empty. If there is a small uptick it’s hard to see how people can cope with it. Our belief is that at some point in time there will be an general improvement in confidence and people will gain more comfort from the situation. When the market does start to rebound things will just fall over because the reserves aren’t in there,” Penn explained.
“Ten per cent of the world’s GDP is dependent in some way on the chip,” Penn claimed.
The long-term trend line for semiconductors is very good, in terms of units. Sudden drops in price when vendors panic put a dent in the profitability and there are whipsaw movements in supply and demand looking back at the past 30 years for which detailed numbers are available. But the long-term trend line for unit demand over those years has remained more or less locked to 10 per cent per year, according to Penn.
“People react very violently to these changes. They don’t react in a thoughtful way, they either go flat out or stop dead,” Penn said.
Because of the global economic turmoil, chipmakers have cut back on capacity spending.
“I know what capacity is going to be in 2014. And it isn’t going to change,” said Penn. What people have bought or ordered so far in terms of chipmaking equipment has fixed what they are going to get in 2014 because it takes many months to become productive with that equipment.
“Capex book to bill is now running at 0.8,” said Penn, referring to SEMI’s latest numbers. It means capacity is not expanding as it should and could contract given the way in which older production kit winds up being taken offstream.
“Accumulate that over time and it tells you that capex spend is going down. We had an acceleration this time last year when confidence was higher. We had a splurge but that has been over for the past nine months. The current forecast is flat at best. Flat from a low number is not good news for an industry that has to grow at 10 per cent per year from a unit point of view,” Penn said.
Trouble was postponed by a bad year in 2012 which Future Horizons had forecast as growing 8 per cent in value but which fell 2.4 per cent instead when the market turned south in June.
The question remains, says Penn, when the economy finally starts to recover. The company has forecast growth of close to 8 per cent this year on the basis that the economy should be more stable this year than last. “These aren’t aggressive numbers,” he noted.
A fair chunk of the growth could come from a reversal in price in a market that is used to deflation. “If capacity is really tight as it looks as it could be, prices could go up and go up quite rapidly,” said Penn.
“If 2013 is the year when the economy turns, you better hang on to your hats in 2014. Because we haven’t invested. 2014 is already starved of capacity. That will only get worse over the next six months,” Penn claimed. “The capacity isn’t there to feed it.”