Chip prices will fall along with capital spending
By James Carbone -- Purchasing, 1/15/2009 2:00:00 AM
Electronics buyers can expect another year of falling prices and short leadtimes for most semiconductors in 2009 because of the economic slowdown and overall weaker demand for electronics systems and components.
How much demand in the semiconductor market declines is a matter of debate among analysts, trade associations and suppliers (see table). But the experts agree that the declines may be worse if the economy falls deeper into recession.
Chip sales will fall because electronics systems production will decline 2% this year. Most end markets for electronics equipment and computers will post declines in 2009. And unlike some other industries, there don't seem to be any recession-proof segments in electronics.
"In relative terms you will find industrial customers and medical segments tend to have less drag," says Ganesh Moorthy, executive vice president of Microchip Technologies in Phoenix. "Those are more steady businesses and are resilient and predictable. But given the current environment I don't see any segment that can claim it will see growth."
With no growth in end customer segments, electronic component demand will decline and prices will fall because there is still plenty of chip capacity. For buyers, the downside of falling prices and declining revenue in the semiconductor market is that chipmakers will also reduce their capital expenditures by about 15% in 2009 to about $39 billion from $46 billion in 2008. That lack of capital spending on new fabs, production lines and new equipment in 2009 will lead to tighter supply and higher prices if demand returns in 2010 and 2011 because suppliers will not have the necessary capacity.
In recent years, semiconductor suppliers—specifically memory IC suppliers—added too much capacity resulting in falling chip prices. In 2007, total revenue for the memory IC industry was about $58 billion, says Jim Elliott, vice president of marketing at Samsung Semiconductor in San Jose, Calif. Memory chipmakers invested about $30 billion in capital expenditures for new fabs and new equipment to increase capacity, he says.
That is about 53% of revenue, so for every dollar in revenue the industry invested 53¢. The ratio was an all-time high. Elliot says such a level of investment is "unsustainable" and in 2009 the ratio will fall to the mid-20% range.
"That will be the lowest percentage we have seen since 2002–2003 timeframe which set the stage for the boom years we had in 2004–-2005 and 2006," says Elliott. During those years demand was strong, prices were stable and suppliers saw steady revenue growth.
For buyers the reduction in the amount of capital spending won't be felt until 2010 and 2011 when supply will tighten, leadtimes will stretch and prices will increase. But chip suppliers will boost capital spending in 2010, according to Bill McClean, president of IC Insights, when capital spending will rise by about 15%.
He says in the past 25 years, there have been three periods when semiconductor capital spending declined by double digits for two years in a row. It happened in 1985/1986, 1997/1998 and 2001/2002 and it will happen in 2008/2009. "Every time there was a two-year double-digit decline in capital spending, the following year showed a double-digit increase," McClean says.
From their perspective, analysts and suppliers say there will be few bright spots for semiconductors in 2009 because of the global downturn. Overall unit shipments of semiconductors will be flat with a few exceptions. For instance shipments of 16-bit microcontrollers will rise 9%; voltage regulators will increase 7%; programmable logic devices, 6% and interface chips, 5%, according to the SIA.
In some cases while the number of units may decline, but the actual number of bits will increase as higher density parts ship. An example is DRAM bit shipments, which increased by about 50% in 2008 because of Microsoft's new Vista operating system which requires more memory. The amount of memory in a PC doubled from about 1GB in 2007 to 2GB in 2008.
"We see a 40% bit growth in DRAM demand in 2009," says Elliott. The average amount of memory in a PC will be about 2.8GB in 2009, he says.
With NAND flash memory, bit demand will be even higher as the amount of NAND flash memory that ships in 2009 will double from 2008 due to its use for data storage in portable music players, cell phones, digital cameras and new flash-based solid state drives (SSD) which will be designed into more portable computers in 2009. In some cases, SSDs will replace hard disk drives in laptops.
The attached rate for SSDs in portable computers in 2008 was 1–2%. In 2009 it will increase to 6–7% and by 2011, 25% of notebooks will have SSDs, says Elliott.
The good news for flash memory buyers is that although flash bit demand will rise in 2009, prices will fall. The average price of a flash memory chip will fall 17% to $2.18, according to IC Insights.
While the downturn will be deep in 2009, most analysts say growth will return to the chip industry in 2010 with some forecasting double-digit sales increases. Growth in 2010 will be due in part to new design work expected in 2009.
"From our experience in this down cycle, our customers continue to have a fair amount of design activity as they try to be in a position for cost reduction for existing products or building new generations of their products," says Moorthy.
| Source | Estimate of 2009 chip market |
| The Semiconductor Industry Association | Down 5.6% |
| IC Insights | Down 5% |
| iSuppli | Down 9.6% |
| Gartner Inc | Down 16% |
| Source: IC Insights. | |
| Memory integrated circuit | 9% price decline |
| Microcontrollers | 8% |
| Microprocessors | 7% |
| Analog chips | 4% |
| Standard logic | 3% |
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