As “fans” of David Lereah well know, the purpose of industry trade groups is to… well… promote the industry. While they typically provide solid data that can be used in analysis, one always has to keep an eye out for their spin. Not surprisingly, the forecasts provided by industry groups tend to be on the optimistic side. The problem is, years don’t go on forever, and at some point the forecast has to be reconciled with reality. For the World Semiconductor Trade Statistics (WSTS) organization, that point was today.
Global chip makers cut 2006 sales outlook | Reuters.com
The global semiconductor market is now expected to grow by 8.5 percent to $247 billion in 2006, according to World Semiconductor Trade Statistics (WSTS) which groups the world’s main semiconductor manufacturers. In May it still expected growth of 10.1 percent.The WSTS group also trimmed its 2007 growth estimate for the worldwide semiconductor market to 8.6 percent from an earlier expectation of 11 percent growth. For 2008 it sees 12.1 percent growth, it added in its bi-annual market forecast. The adjusted forecast comes after a few important chip categories lagged behind initial expectations.
As you may guess, we are not surprised. But what’s done is done, and while 2006 is essentially in the bag what about the forecasts for 2007 and 2008? The chart below shows the year/year growth rate in semiconductor sales for each month going back to 1998. Data is courtesy of the Semiconductor Industry Association (SIA).
This tells us a few things:
- The semiconductor sales growth rate has been more consistent since 2005 (in the mid-high single digits.)
- The forecast calls for that to essentially continue for two more years.
- The chart tells us that is pretty dadgum unlikely.
Sales growth is likely to be either much higher or much lower than 8.6% next year. The million dollar question (or however much you may have at stake – for us it’s more like a couple thousand) is which direction. We’re betting it is lower.
For one thing, this is the longest the semi industry has ever gone without a year/year decline. By itself that doesn’t mean much – due to the fabless/foundry model and general tech industry maturity sales growth should be less volatile.
However, when you combine low volatility in sales growth with huge orders for new manufacturing equipment you end up with oversupply. Oversupply in a cyclical industry means sharper than normal price reductions. If the prices fall faster than unit demand rises – you get a decline in sales.
The other reason we expect semiconductor sales to be less than the industry predicts next year is summed up in the following chart, which tracks the total sales (rather than growth) over the preceding twelve months. There has been a definite change in the overall growth rate, going back to about 1995 or 1996, depending on where you want to draw the lines. For simplicity, we’ll just use the last 10 years (September 1996 – August 2006). Over that time frame, the average growth rate has been 6.3%. However, it is easy to see that that rate is toward the top of the new range (the trendline represents resistance in this case.)
So, given overcapacity, volatility and resistance we think 8.6% growth in 2007 is on the optimistic side. Perhaps even the wildly optimistic side.
Disclosure: William Trent has a long position in SMH.