Worst is Likely Over for ICs

Electronic News, July 9, 2001 by Bill Mclean

The April 2001 worldwide IC market figures were released by WSTS in early June. To say that these figures were weak is an extreme understatement. The total worldwide IC market in April was only $9.1 billion, which was 17 percent lower than the January results (the first month of the previous quarter). Since April is a four-week accounting month (March, June, September and December are five-week months), its $9.1 billion sales level equates to a 2001 annual IC market run-rate of only about $125 billion. Considering that the 2000 IC market was $177 billion, a 2001 $125 billion annual run-rate is shocking.

The only good thing that can be said about the first half of the 2001 IC market is that it is in the past. Although consistent historical data is available only back to 1980, IC Insights believes that the first quarter and second quarter 200l IC markets displayed two of the four worst sequential quarterly declines in the history of the IC industry (see chart below).

The unprecedented rapid decline in the first half of the 2001 IC market makes it even more likely, in IC Insights' opinion, that quarterly sequential growth will begin in the second half. The 15 percent the March quarter and 5 percent expected in the June quarter declines in IC unit volume shipments are strong evidence that a massive inventory burn took place in the first half of 2001. With most electronic system producers' IC inventories in balance by the end of the September quarter (networking equipment suppliers may be the exception), IC Insights believes that the third quarter will show a structural rebound with sequential quarterly growth in both IC unit and dollar volume figures.

Structural Rebound Expected in Second Half

IC Insights' best-case, worst-case and most-likely case IC market scenarios for 2001 are as follows: The best-case scenario for the IC market in 2001 is a 15 percent decline from 2000; the worst-case scenario is a 28 percent drop; while the most-likely scenario is for a 21 percent decline. Note that IC Insights' forecast of minus 21 percent makes the 2001 IC market decline the largest on record, surpassing 1985's 20 percent slide.

Assuming that the United States is not in an outright recession, IC Insights still expects a 6 percent sequential increase in the IC market to occur in the third quarter. Moreover, an 11 percent sequential jump is forecast for the fourth quarter. If the IC market follows a path similar to our forecast, the second-half IC market would still register only a moderate 4 percent increase as compared to the first half of 2001.

Regarding IC market growth in the second half of 2001, IC Insights believes that:

* The IC market has the potential to display strong sequential quarterly growth in the second half of 2001, even without a significant increase in electronic system sales.

* The IC industry's 36 percent IC market and 27 percent IC unit volume increases in 2000 were excessively high compared to long-term industry averages. Likewise, the huge quarterly IC market and unit volume declines in the first half of 2001 must also be considered excessive.

* A structural rebound is typically caused by inventory balancing.

For example, after a significant amount of an electronic system company's excess IC inventory is depleted. even with a flat system sales rate, the company eventually needs to come back into the IC market and order more parts--causing a structural rebound. These new IC orders are essentially just replacing the IC components the system producer was using from its inventory.

It should also be remembered that because of rapidly advancing technology, most of the IC inventory accumulated in late 2000 will become obsolete in the fourth quarter. Thus, electronic system producers that intend to boost their sales later this year will need to be able to offer the most advanced systems they can produce--systems that require leading-edge IC components.

There are a few points that need to be made about a potential structural rebound in the second half of 2001. First, even with sequential growth in the IC market in the third and fourth quarters of this year, it would not be enough to prevent the IC market from registering a significant decline for the year. Second, the occurrence of a structural rebound does not mean that the next boom period has begun. Overall, annual semiconductor-market growth rates of 20 percent or greater will most likely require electronic system sales growth rates at or above the long-term average (i.e., 8 percent). IC Insights does not expect this situation to occur until 2003.

Bill McClean is president of IC Insights Inc., based in Scottsdale, Ariz.

Ten Worst Quarterly IC
Market Declines Since 1980
Rank       Quarter  Sequential   Next     Next     Next
                      Market    Quarter  Quarter  Quarter
                     Decline    Change   Change   Change
1           1Q01       -21%      -14%      --       --
2           1Q85       -18%       -8%      -8%       2%
3           2Q96       -14%       -3%       8%       0%
4           2Q01       -14%       --       --       --
5           1Q98       -10%       -6%       5%      11%
6           1Q96       -9%       -14%      -3%       8%
7           2Q85       -8%        -8%       2%      11%
8           3Q85       -8%         2%      11%      18%
9           1Q81       -8%        -1%      -2%       3%
10          2Q98       -6%         5%      11%      -2%
Quarterly
Avg.         --        -12%       -5%       3%       6%
SOURCE: WSTS, IC INSIGHTS