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IC
Insights, Inc.

Scottsdale, Arizona USA

www.icinsights.com

Electronic
Engineering Times, © 1998, CMP Media Inc.

May 27, 1998

Chip
Market Edges Forward

By
Bill McClean

The
worldwide electronics industry is composed of many different
sub-industries. At the top of the food chain is the total
electronic-systems segment with 1997 sales of $770 billion
(
Figure
1
).
With a still-healthy 7 percent growth rate forecast for 1998
and assuming an average annual increase of 7 percent to 8
percent after 1998, the electronic-systems market will
exceed $1 trillion by 2001.

As
a rule of thumb, the semiconductor market grows at about
twice the annual rate of the systems industry (i.e., 17
percent cumulative annual growth rate (CAGR) for
semiconductors and 9 percent CAGR for electronic systems).
Because semiconductors are not standalone entities and must
be incorporated into systems, the growth rate for the
semiconductor market depends on more than just the growth
rate of the systems market.

The
driving force behind the historically high growth of the
semiconductor industry as compared to the systems business
is the increasing penetration of semiconductor value within
electronic systems. Through 1997, the semiconductor value as
a percentage of electronic-system sales peaked at 21.6
percent in the boom year of 1995. IC Insights forecasts that
the average percent semiconductor figure will increase about
1.5 points per year over 1998’s 17.9 percent level to reach
25.2 percent by 2002 (
Figure
2
).

While
the correlation between the growth of a country’s Gross
Domestic Product (GDP) and the health and size of its
semiconductor market is not absolute, there is some
interdependence. It is very difficult to have a strong
worldwide semiconductor market in the face of recessions.
For example, over a 19-year period, (1978-1997), the CAGR
was only 17 percent. Despite that CAGR, no single year
during that period actually displayed a 17 percent growth
rate. In fact, the closest any one year came to this
“average” was in 1979, 1986, 1987 and 1992, all of which had
growth rates that were 7 percentage points above or below
the 17 percent figure. Thus, the semiconductor market over
the last 19 years grew 10 percent or less, or 24 percent or
greater in any one year. And 1998 is forecast to continue
this trend — unfortunately on the low end — with an
increase of only 8 percent.

The
rest of the world (ROW) was the only major region to exhibit
double-digit semiconductor sales growth in 1997 with 10
percent. Under normal circumstances, the forecast for the
ROW semiconductor market for 1998 would be much higher than
the worldwide average. However, with all of the current
uncertainty surrounding the stability of many of the Asia
Pacific economies, IC Insights forecasts that the 1998 ROW
semiconductor market will grow only a few percentage points
greater than the industry average.

Four
Asian countries, led by Taiwan’s 30 percent share,
represented 82 percent of ROW IC consumption in 1997
(
Figure
3
).
Although Taiwan and China are forecast to display slowing
GDP growth in 1998, each country is still expected to post a
better than 5 percent GDP increase (China 7 percent and
Taiwan 5.7 percent).

One of
the weakest and most uncertain countries in the ROW region
is South Korea. However, it should be noted that it consumes
only 15 percent of the ICs in the ROW segment, which equates
only to approximately 3 percent of the worldwide IC
industry. As long as a total economic collapse of the ROW
region (which could possibly be triggered by the
disintegration of the Japanese economy) is averted, the
effects of the Asian flu on the worldwide semiconductor
market should be moderate.

Volume
and pricing

One of
the surprising aspects of the 1997 IC market was the 22
percent surge in unit volume shipments, the highest
exhibited since 1984, another boom year. Although average
selling prices (ASPs) and unit volumes do not perfectly
follow the elasticity-of-demand theory (lower ASPs spur
higher unit volume and higher ASPs negatively affect unit
shipments), historically there has been at least a loose
correlation.

IC
Insights forecasts that the IC unit growth rate for 1998
will return to a more normal, but still strong, level of 14
percent. If the abnormally weak increase of 2 percent in
1996 is combined with 1997’s 22 percent surge, the average
increase for this two-year period is 12 percent, the same as
the 1993-to-1997 IC unit shipment CAGR.

Interestingly,
the IC industry in 1996 and 1997 witnessed decreasing IC
ASPs. IC Insights said that this was the first time in
industry history that annual back-to-back IC ASP declines
took place. With the ASP expected to decline another 6
percent in 1998, the industry appears to be heading for an
unprecedented third year in a row of declining
prices.

The
real driving force behind the current IC pricing trends is
capacity. The 1990s have thus far endured both extremes of
the capacity spectrum. While 1993 to 1995 witnessed a
paucity of capacity worldwide, the industry made a 180
degree turn beginning in 1996. The resulting overcapacity
that began in January 1996 continues to drag down IC
industry dollar volume growth in 1998.

Unsurprisingly,
the IC overcapacity environment can be traced back to the
simple balance, or imbalance, of supply and demand. In this
case, considering the 22 percent surge in unit volume and 98
percent increase in DRAM bit-volume use that occurred in
1997 (
Figure
4
),
the surplus of IC capacity is not the result of lower
demand. Thus, the focus must be on the supply side of the
equation.

It
is estimated that semiconductor capital spending must
average 23 percent to 24 percent of total semiconductor
sales for semiconductor producers to keep up with industry
demand. The lackluster semiconductor industry from 1989
through 1993, when growth rates were 10 percent or less each
year, caused many chip makers to slash capital spending.
This frugality is what led to the capacity shortfall that
began to show itself in 1994. It should be remembered that
because of the 18-month-to-two-year startup and construction
time needed for IC facilities to fully come online, the
effects of over- or under-spending typically take some time
to unfold.

As the
IC industry began to gain momentum in 1994 and into 1995,
producers attempted to make up for those spending cuts. By
1996, capital spending as a percent of semiconductor sales
reached an all-time high of 32 percent. For 1998, the figure
will recede to only about 26 percent (
Figure
5
).

Not
surprisingly, the IC industry is rarely at a “normal”
spending ratio for very long. It seems that the industry is
always overreacting with its spending budgets one way or the
other. What typically happens is that 15 IC producers each
plan, and spend, to get a 10 percent share of a particular
market (of course, this is a statistical impossibility).
Siemens, Oki, Samsung and others do not check with each
other about capital spending plans and adjust accordingly.
Rather, each has its own strategic capacity and spending
budget to carry out.

The
inherent lag time in getting a new IC facility built and
productive, coupled with the usual industry-wide over- or
under-spending, has created the history of volatility in
capacity. This in turn has led to the sometimes wildly
fluctuating IC ASPs, which have helped create the famous —
or infamous — boom-bust periods in the IC market.

What
does the future hold for IC industry capacity? Besides the
obvious answer of more volatility, it is interesting to look
at the role the Taiwanese producers may play in the future
IC capacity framework.

IC
Insights estimates that worldwide MOS wafer capacity in 1997
was about 70 million 150-mm wafer equivalents. Moreover, at
the end of 1997, Taiwanese IC producers had the equivalent
capacity of approximately 10 million 150-mm wafers (with
about 50 percent dedicated for foundry work). While this
works out to a 14 percent share of worldwide MOS IC wafer
capacity, the Taiwanese held only about a 4 percent share of
1997 MOS IC dollar volume (
Figure
6
).

The
situation of the Taiwanese is such that the capacity exists
for these suppliers to more than triple their MOS IC market
share. However, since they are playing in a zero-sum game,
for Taiwanese companies to gain 10 points of market share
somebody has to lose 10 points. It is in this battle for
market share that significant IC pricing pressures have been
created.

For
1998, IC Insights forecasts that some of the severe pricing
pressure of 1997 will be relieved. However, with capacity
still relatively plentiful, IC ASPs are predicted to
continue to slide, decreasing 6 percent in 1998 vs. the
long-term average annual ASP increase of 5
percent.

One
interesting facet of overcapacity is that time deteriorates
the usefulness of some of this capacity. Because of the
relentless move to finer feature sizes, increased densities
and higher performance, capacity installed four or five
years ago must be upgraded through new facilities and/or
equipment in order to meet the technological demands of
today.

Thus,
the producer that intends to be successful over the long
term must be dedicated to investing in new capacity even in
the face of a slumping market. However, depending on the
aggressiveness of these IC producers, or a small group of
producers, continued spending during a downturn will usually
keep the overcapacity-weak-ASP cycle intact. Of the four
major regions, only Europe is forecast to have a higher GDP
growth rate in 1998 than 1997.

With
economic instability present throughout much of the
Asia-Pacific region (especially in Malaysia, Thailand and
South Korea) in 1998, most economists lowered their
expectations of GDP growth for the individual countries in
this area. Although China and Taiwan still possess
relatively healthy economies, they have significant trade
with the weaker Asian nations. It is this weaker trade
situation that is expected to lower all the GDP growth rates
of the region.

So with
an overall weakening of almost all the major economies in
1998, why would the semiconductor industry show slightly
better growth in 1998 than in 1997? Once again, the tie
between GDP growth and the semiconductor industry is not
that tight. For example, in 1996, when most of the major
economies were enjoying relatively high GDP growth rates
(e.g., 3.6 percent in Japan), the worldwide semiconductor
market declined 9 percent.

For
1998, IC Insights believes that the slowing Asian economies
will take some of the strength away from the ROW results.
However, this region is once again expected to be the
growth-rate leader for electronic system production as well
as semiconductor consumption in 1998.

 


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© 1998 IC Insights, Inc.