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Wednesday, January 23, 2008

Is there an abrupt change happening to the semiconductor industry cycle?

Jan 23 2008 11:01AM |

According to Bill McClean, president of market research firm IC Insights Inc, increased specialization of IC suppliers has brought about an abrupt change to the semiconductor industry cycle. Historically, the semiconductor industry acted as one giant cycle, which contained eight very distinct stages (see Figure 1).

McClean notes that although the exact timing of moving from one phase to the next within a cycle was always difficult to predict, there were some key elements such as worldwide GDP growth, electronic system sales growth, IC unit volume shipments and semiconductor industry capital spending trends that suggested when a cycle was bottoming or peaking.

Since 2004, he says, the traditional industry cycle model has taken on a new look. It appears that the previous singular IC industry cycle that typically influenced all IC product segments at essentially the same time (although not to the same extent) has evolved into at least four sub-cycles (see Figure 2).

IC Insights also says a case could be made that DRAM and flash operate in their own individual cycles with individual product cycles moving independently of each other and sometimes counter to the overall trend in the IC industry.

McClean believes one reason for the evolution from one large cycle to four smaller ones is the increased specialization of the IC supplier.

In the past, many large IC suppliers such as Motorola, TI and NEC competed in many product segments such as DRAM, logic, analog, MPUs and others, but most companies have moved, or are moving to, more focused IC product lines which has driven capital investment and R&D dollars to be more focused on a particular IC product segment.

Also, each IC product segment (i.e., foundry, DRAM, MPU, etc.) now faces its own competitive environment that does not necessarily coincide with the other product segments, the company pointed out.

IC Insights points to the DRAM market as a good recent example of a sub-cycle. In 2006, the DRAM market grew 32% with DRAM ASP increasing 13%. In contrast, the total IC market grew 9% in 2006 with IC ASP dropping 8%. Moreover, the surge in capital spending in 2006 for DRAM, up 44%, was more than twice the total semiconductor industry increase in capital spending (18%).

As a result of this DRAM spending surge in 2007, DRAM ASP declined 39% in comparison to a 6% decline in industry-wide IC ASP.

Another example that IC Insights gives of the workings of a sub-cycle was the significant IC unit inventory correction in Q4 2006 to Q1 2007 in the analog and DSP IC segments targeting the cellular phone business which had little to no affect on the MPU, MCU, and many other IC product segments.

As such, the current MPU marketplace must also be considered an example of a sub-cycle, McClean believes.

With only Intel and AMD left as major suppliers to this large IC segment, which was $35 billion in 2007, capital spending, R&D spending, pricing schedules or price wars, etc., for MPUs are now really in control of only these two companies. Therefore, IC Insights says the MPU sub-cycle can be expected to behave in the future in a manner that is sometimes out of phase with other IC product segment cycles.

Finally, IC Insights believes these sub-cycles will continue to act to moderate the intensity of the total IC industry cycle and despite the irrational exuberance of the DRAM and flash memory capital spending in 2006 and 2007, it is expected that more rational future capital spending by increasingly specialized IC suppliers will continue to support the sub-cycle model and moderate the volatility of the total IC industry cycle.

At the same time, IC Insights believes that the potential still exists for the IC product sub-cycles to come into alignment, in the strong or weak portions of their respective cycles, and create very weak IC industry growth of negative 10% or lower or very strong IC industry growth of 20% or higher.

This is a very interesting concept and I can see how this makes sense in some cases. What has been your experience and observation?

Please chime in with comments!

–Ann Steffora Mutschler, Senior Editor