While widespread sentiment is mixed for a near-term recovery in the semiconductor industry, positive signs are beginning to appear.
Chipmaker giant Intel on August 22 raised its third-quarter revenue guidance from a range of US$6.9 billion to US$7.5 billion to a range of US$7.3 billion to US$7.8 billion on rising worldwide sales, a strong indication for a broad-based global recovery in the semiconductor industry.
Even without Intel’s lead, various signals in both downstream and upstream markets hint at an upbeat future. Rising consumer end-product demand, high fabrication capacity utilization rates and a cautious approach to capital spending will result in higher near-term profitability for the general semiconductor industry.
High downstream demand for PCs and mobile phones
Growing downstream market demand is the ultimate driver of recovery in the semiconductor industry.
According to market research firm International Data Corporation (IDC), 2002 and 2003 global IT spending amounted to US$821.3 billion and US$826.4 billion, respectively. For 2004, IDC projects IT spending to grow 4.73% to US$913.5 billion on increased PC, server, mobile phone and consumer electronics sales.
PC shipments are projected to grow 7.6% in 2003, up from an earlier forecast of 4.1%, according to IDC.
In the telecom market, while new competitors from China may be cutting into the operating profits of other companies, the rise of new color displays is driving a surge in market demand. Motorola, the world’s second-largest handset maker, recently expressed strong optimism about handset sales in 2004.
Sales of DVD players and other consumer electronics are also on the rise.
Capital expenditures/sales ratio below 0.2
Signs of a semiconductor industry recovery can be seen in industry capital expenditures.
According to market research firm Dataquest, the year 2000 saw total industry capital expenditures of US$58.9 billion, while iSuppli estimated capital expenditures of US$69.9 billion. Taking the year’s total market size, capital expenditure/sales reached 0.29 for the year, only second to 1996’s 0.34 historic high.
However, since the bubble burst, revenues have fallen dramatically for semiconductor companies that were unable to recover their capital expenditure costs. This has resulted in a comparable decrease in capital expenditures due to a negative industry outlook. In 2001 and 2002, capital expenditures fell to US$38.5 billion and $27.8 billion, respectively, with capital expenditures to sales ratios falling to 0.277 and 0.197. Only 1992 and 1993 saw capital expenditures to sales ratios below 0.2.
With capital expansion conservative in the past two years, this has resulted in higher utilization of existing capacity. According to semiconductor market research group SICAS, capacity utilization has risen from 81.5% in 2002 to 85.9% in 2003. With downstream market demand on the rise, semiconductor companies in the past would increase capital spending, but because of the experience in 2000, companies are taking a cautious approach.
According to statistics, 2003 capital expenditures will grow 7.9-15.1% from 2002 to US$30 billion to US$32 billion, for a capital expenditures to sales ratio of 0.188-0.2 using the total market capitalization of US$159.3 billion. This is also the first time since 1992 and 1993 that the capital expenditures to sales ratio has been below 0.2 two consecutive years in a row.
Conservative capital expenditures mean lower costs for companies, and with global semiconductor capacity utilization high and growing revenues from downstream demand, industry profitability is looking up.
B/B value steadily on the rise
Trade association Semiconductor Equipment and Materials International (SEMI) recently reported a July book-to-bill ratio of 0.97 on bookings of US$763 million. Although total bookings are only a quarter of the peak in 2000, the number is 5.7% higher than June. July’s billings of US$788 million were 1.43% higher than June.
The B/B ratio measures the growth of worldwide semiconductor equipment orders for North American equipment providers against delivery of the equipment. A ratio over 1.0 represents new orders growing faster than shipments, while a ratio less than 1.0 represent orders trailing actual shipments.
Ending July, this also marks the first time since the collapse of the semiconductor industry that the B/B ratio has been above 0.9 for eight straight months. The positive sign signifies a recovering semiconductor industry, and both bookings and billings are projected to continually increase.
DRAM: Tomorrow’s star
The current recovery is unlike ones from the past.
First, the scale of this recovery is smaller but more drawn out than previous recoveries. On the supply side, capital expenditures have been slower to pick up relative to positive industry signs, partly due to sharp losses in the past two to three years.
Also, costs for advanced manufacturing processes frequently are in the billions of US dollars, creating huge barriers of entry for companies. As a result, capacity expansion is projected to better align with sales than in previous recoveries.
Although market demand for PCs and mobile phones is on the rise, business IT spending will not pick up until 2004, and peak spending is not projected be reached until 2006, according to market research firms. Unlike the past, businesses are expected to slowly upgrade their IT infrastructure, drawing out the recovery in the semiconductor industry.
Many market research firms are also raising growth estimates for the semiconductor industry, projecting double-digit growth for 2004.
Regardless of PCs, mobile phones, or consumer electronics, a recovering semiconductor industry would substantially increase the demand for memory. DRAM and flash memory may just be tomorrow’s star.
Source: SEMI, compiled by DigiTimes, August 2003.
Source: SIA (sales), Dataquest (capex), compiled by DigiTimes, August 2003.
Article edited by Zoran Pavlovski
