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By Jim McGregor, In-Stat
After a disastrous Q'04 to end 2008, it would seem that the high-tech industry had nowhere to go but up. However, the release of Q'01 results from several market leaders has revealed that up wasn't a direction we were headed. An inventory surplus affects semiconductor through PC companies, and consumer spending is still the critical driver for electronics demand.
Unfortunately, our industry suffered from the same global growth spurt that created an inflated view of demand and a surplus of capacity as the US real estate market and the global automotive industry. In addition, the high-tech industry has been particularly susceptible to falling demand from both businesses and consumers.
All of which leave us with mixed signs for the future. As expected, the entire industry from semiconductors to PCs had to deal with a surplus in inventory at a time when demand was falling. In many segments of the market, manufacturing capacity and excess inventory levels have been reduced to desired levels. Going forward into the second half of 2009, the depleted inventory levels should lead to an increase in orders, but with many companies striving to keep inventory levels low and with factory utilization in some segments, particularly semiconductors, at historically low levels, demand will likely go through short spurts until more normalized market conditions and inventory levels return. However, it is difficult to determine what these normalized values should be because of unpredictable buying patterns, especially by consumers.
The consumer segment remains the most critical demand driver for the high-tech market, but the question still remains as to whether the recent changes in buying behavior are temporary or permanent. A reduction in spending by consumers in Asia and Europe was expected because of the more savings conscious and conservative nature of many of the cultures. In the US, however, the change has been dramatic. Savings rates have increased from close to zero to around 5% in one quarter, and even more dramatically from a negative level if you consider the trend of the past decade. Not only could this be a permanent change, but an increasing one to potentially double digit savings rate levels by the end of 2009. This change has serious implications when you consider that the US consumer is a key driver for both the US and global economies, accounting for over 70% and 17% of the GDPs, respectively, the largest of any single group for both economic categories. This places a strong emphasis on the upcoming back-to-school and holiday shopping seasons for electronic devices. In addition, business spending on high-tech products and services is usually one of the first expenses to be reduced and last to rise in an economic downturn. With current economic expectations, this pushes out any significant recovery of business demand to 2010 at the earliest.
So, with some companies already calling the bottom of the market and others issuing cautious notes about the future, what should we expect? With continued strain on consumers and the global financial systems, the best the industry can hope for is some level of stability. There has been some increase in demand in particular markets or segments resulting from government initiatives, as noted in a recent announcement by TSMC when referring to rising demand from China. Intel has also noted some level of stability, as the company has benefited from the introduction of new products and an improved competitive position. These positions by leading companies are important data points that represent an improved outlook, but they do no necessarily represent a short-term return to health for the entire industry. Factory utilization rates throughout the entire high-tech industry remain at very low levels and demand recovery is likely to remain slow because many of the factors, such as rising unemployment, consumer and business credit defaults, will take several quarters to a year to work through the entire economic system.
While there are many signs that continue to point to a tough road for the remainder of 2009, it doesn't mean that we should write off the year as many have suggested. There are still opportunities to balance capacity and reset future growth expectations. This will also be a critical period for many high-tech companies to re-evaluate their strategies and market positions, as seen through recent mergers and acquisitions. In-Stat remains committed to its earlier 2009 semiconductor forecast for a 19.6% reduction in worldwide revenue and a 15.9% reduction in unit shipments, as well as weakness in other consumer and communications products and markets that In-Stat tracks. Our forecasts do, however, predict slowly increasing stability in the market with some growth in the second half of 2009 and throughout 2010. As a result, the best advice is to remain cautious and not anticipate any dramatic changes in overall demand.
For more detail on In-Stat's Semiconductor Forecast, read, "Global Semiconductor End-Use Forecast Is Anyone Buying?," report # IN0904560SSF, and "Global Semiconductor Product Market Forecast Help Wanted: Spenders and Lenders," report # IN0904559SSF, at www.in-stat.com.
Jim McGregor, chief technology strategist at In-Stat may be contacted at email@example.com.