Quick market upturn may hurt semicon's future

SINGAPORE--The semiconductor industry experienced record lows during the 2008-2009 recession. But in a quick upturn in fortunes following market growth since the second half of last year, it enjoyed "record shipments" and "full book orders" in the first quarter of 2010, noted an industry consultant.

Kevin Meehan, a partner at Bain & Company, said in his presentation during the SEMICON Singapore 2010 market trends briefing held Wednesday that the industry is seeing an improvement that is quicker than expected, led by the resurgence in demand for memory units, particularly DRAM (dynamic random access memory) components.

He went on to point out that the industry is expected to rake in US$276 billion in revenue for 2010, and forecasted the market to continue its good showing and strong growth "for the next three to four years".

Need for market consolidation
However, the Bain & Company executive did caution that the quick upturn may not be beneficial for the semicon industry in the long run. He noted that while 2010 revenues are expected to hit US$276 billion, the cost of running wafer fab manufacturing facilities has risen to between US$4 billion and US$5 billion.

"You have to question whether the amount of revenue being generated will be enough to sustain and maximize the cost of running so many foundries," Meehan said.

He cited the example of Taiwan's DRAM sector as one that did not really benefit from the upturn. According to him, the sector showed signs of consolidation early on during the recession, but with the upswing in market sentiments, the consolidation has now been delayed.

As for the foundry scene, Meehan said there are currently only "three to five" companies with the capacity to scale and continue to exist in the future, such as Taiwan Semiconductor Manufacturing Company (TSMC) and Samsung. He added that the second-tier group of foundry operators may not have the financial clout to compete effectively in this space.

This need to consolidate is why the expected increase in merger-and-acquisition activities across the semicon industry, which is symptomatic of the entire technology industry, may not be such a bad thing, the consultant remarked.

Meehan's assessment of the industry's improving fortunes in the short term is reflected by fellow keynote speaker Philip Koh, research vice president at Gartner. He pointed out that due to the depressed market state in the fourth quarter of 2009, the semicon industry is expected to rebound as much 13 percent growth in the first quarter of 2010, he added.

The Gartner analyst did note that following this exponential growth rate from 2009 to 2010, the market will level off to single-digit growth from 2011 to 2014.

PCs, smartphones to lead semicon growth
Koh drilled further into his analysis, paying attention to the key drivers of the industry: personal computers (PCs) and cell phones.

In terms of the PC market, the analyst noted that the production unit growth is expected to be 20 percent, up from 13 percent in last year's fourth-quarter results. However, this growth is expected to fall below "seasonal norms" from the second half of 2010 as component sales move to align with sales of electronics, following the former's explosive growth in the first quarter, he added.

"Memory sales, particularly DRAM sales, will be the main driver of the semicon industry as it is expected to make up 37.6 percent of the US$276 billion revenue forecasted to come in this year," said Koh, reiterating Meehan's earlier point.

Meanwhile, the analyst said that entry-level smartphones will become the major market driver beginning in 2011.

This is indicative of the increasing presence and adoption of smartphones among users, a point he further reiterated by mentioning that demand for smartphones will outstrip that of enhanced and basic feature phones from 2013.

Furthermore, Gartner is predicting that by 2013, all smartphones will come equipped with "integrated Wi-Fi, Bluetooth and GPS (global positioning system)" capabilities. These additional features will mean increased demand for newer, better chips, Koh noted.