Still Too Many Semiconductors Coming
The Semiconductor Industry Association (SIA) released their Global Sales Report for August this morning. Worldwide sales of semiconductors reached an alltime monthly record of $20.5 billion in August, an increase of 10.5 percent from the $18.6 billion reported in August 2005, the report says.
Year/year growth of 10.5% is not all that bad for a mature industry like semiconductors (although it is down from the 11.7% year/year growth rate seen in July), especially given the perennial overhang of lower prices. It certainly bests the average growth of the last 10 years (which includes both the late 1990’s boom and the subsequent bust, so presumably should be just about right.) Any guess as to the cumulative average growth rate in semiconductor sales over the last 10 years? If you said 5.9%, about in line with nominal GDP growth, you were right.
The problem is, no one seems to have told the semiconductor manufacturers that growth has slowed down. In August they placed orders for nearly 70% more semiconductor manufacturing equipment than they ordered one year ago. By comparing the growth rates from the SIA reported chip sales to the equipment order data from Semiconductor Equipment and Materials International (SEMI) yields the following chart:
Once that equipment gets installed there is going to be a glut beyond belief. This has already started to happen, according to the SIA press release:
“Inventories have risen both at semiconductor manufacturers and in the channel in recent months, but remain in line with requirements for the holiday build season,” [SIA President George] Scalise concluded.
We aren’t so sanguine. Orders for equipment have far outpaced sales growth throughout 2006, and there is no end in sight. With chip sales growth already off the July peak, heaven help the semi makers should an honest-to-goodness consumer slowdown unfold. The SIA appears unfazed:
Capacity utilization remains strong. VLSI Research estimates that capacity utilization, which was at 92 percent in the second quarter, will remain at 95 percent for the remainder of the year. Capacity utilization remains high even as new 300mm manufacturing facilities continue to come on line. Facilities producing 300mm wafers now account for nearly one-quarter of total capacity – up from less than 15 percent at this time last year.
Once that equipment gets installed there is going to be plenty of capacity. And nobody will be able to explain away the warehouses full of microchips as “in line with requirements.”
Disclosure: William Trent has a long position in SMH.
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[…] If they are so convinced that demand will be up a steady 7% per year (they are probably a little optimistic) why are they ordering 70% more semiconductor manufacturing equipment than they did last year? As anyone in the chemical industry could easily tell them, cycles aren’t caused by swings in demand - they are caused by swings in supply. And supply is starting to swing toward the side of “too much.” […]
[…] ST Microelectronics (STM) lowered its chip sales forecast for 2006 and believes sales will grow 6-11% in 2007. The 6-11% is higher than the average industry growth of the last 10 years, and we would expect growth nearer the bottom than the top end of that range, but we don’t think it is an outrageous forecast. What’s more, STM has been doing what we believe all semiconductor firms should be doing: namely reducing spending on new capacity. According to their most recent earnings release: Capital expenditures were $399 million in the 2006 second quarter and $696 million for the first half, compared to $363 million and $927 million in the 2005 similar periods, respectively. […]
[…] We have written once or twice… per week… about what we have seen as a rising risk of overcapacity at the semiconductor companies. Some people have written it off to preparations for holiday sales. “Inventories have risen both at semiconductor manufacturers and in the channel in recent months, but remain in line with requirements for the holiday build season,” [SIA President George] Scalise concluded. […]