SAN JOSE, Calif. — The semiconductor market is looking at a slow return to growth in the next four years. But it will be a modest return to expansion, tamped down not just economic conditions but by the fact that this market is already quite mature.
That’s the sentiment of market researcher Gartner, which presented a half-day series of market analysis sessions to representatives of major chip companies here in the Silicon Valley.
By 2013, the overall semiconductor market will have a compounded annual growth rate (CAGR) of just 2.5 percent. Even if our economy was healthy and unemployment low, it would have a CAGR of 5 percent at best. The market, said Bryan Lewis, research vice president and chief analyst in Gartner’s semiconductor group, is mature.
“If you look at the last 20 years, CAGR went from 20 percent to 15 percent to 5 percent to 2 percent. It’s been a long-slowing process because the semiconductor market is maturing and has gotten better at putting more functionality in a smaller space,” he told InternetNews.com following his speech.
One example involves nVidia (NASDAQ: NVDA), which is fighting to continue a chipset that market analyst believe is on the way out. Functionality normally reserved for chipsets, like graphics and memory, are being moved into the CPU. Intel (NASDAQ: INTC), AMD (NYSE: AMD) and nVidia all have chipset businesses, but only nVidia lacks a CPU side to its business — and is looking at the potential loss of almost $1 billion in revenue.
Keep spending (please)
Lewis said it was a good thing to have the government stimulus packages this past year, more so in China than the U.S. since China put that money into technical infrastructure. That alone has kept China going, though it’s questionable whether it can continue to spend at a high rate.
“For the last few quarters, [China] were pulling us along with things like the wireless 3G build out. They ate up a lot of inventory on low-cost PCs and low-cost TVs. There is concern if China backs off on stimulus spending, it could start the ‘W’,” he said — a term used to describe what’s also known as a “double-dip recession,” where the economy shrinks, starts to recover, then shrinks again before beginning a real recovery.
Gartner has noted, as have other researchers, that the spike in product sales in the last few quarters hasn’t gone into inventories — it’s gone straight into products. There has been a flurry of new PC announcements from virtually every vendor, all announcing new laptops to ship on Oct. 22, the date of Windows 7’s launch.
Windows 7 is generally well-regarded. Even The Wall Street Journal‘s respected tech columnist, Walter Mossberg, gave it an enthusiastic review. But will it get American consumers buying? Not really — but people will buy for other reasons anyway, said Lewis.
“The main driver in 2010 is PC replacement. IT budgets have been low for almost a year, those purchases have been delayed. Main reason corporations will be buying a PC is because the systems are old. The Windows 7 effect is there but main reason for an increase in sales is these things are gonna break,” he said.
Through 2013, Gartner sees the desktop PC market holding steady, even though the whole market seems to be shifting to notebooks. Notebooks and netbooks will continue to grow in volume and will be the reason for expanding the overall PC market. Desktops will dip slightly but won’t just go away.
“I’m surprised desktop is hanging around as long as it has. A huge portion of the corporate world is not traveling so they don’t need a laptop, so desktop is hanging on,” said Lewis.
Another market seeing shift is mobile phones. Gartner predicts the market for mid-level “enhanced” handsets — with features like 2.5G wireless connectivity — will be increasingly squeezed in the middle, with low-end, basic phones on one end and smartphones on the other.
Lewis said the declining price of smartphones makes them so appealing that consumers with the money to spend would rather get an Apple iPhone or RIM BlackBerry than a basic flip phone with a few extra menu options. Meanwhile, in the emerging world, basic, cheap phones will be the way to go.
Lessons learned and not learned
Inventory control has become one of the hallmarks of this downturn. Companies may have had a harder time selling products in the past year, but at least they aren’t getting saddled with stockpiled inventory like they did during the slowdown in 2001. Intel, for example, has talked up its inventory hub system that gives it daily insight into the channel, which helps it adjust accordingly.
[cob:Special_Report]””If you look at 2001, that recession was driven out of the dot-com bust and also a commercial sales bust. Because customers were buying so much, buying extra product, double ordering, that put a ton of inventory in the system that took a long time to burn off,” said Lewis.
In 2008, it was completely different. The channels were watched closely, and double ordering didn’t happen.
“It’s all been about supply chain management and inventory control. People learned out of 2001 not to let that happen again,” he said.
But some industries haven’t taken their lessons to heart. Memory makers, which bled money so badly due to their overcapacity that one analyst described them as “wrapping dollar bills around every chip they sell,” are poised to make that mistake again through new capacity plans from 2011 onward.
As it is, the chief reason the market recovered in 2009 is because several memory makers went bust, taking supply out of the market. It looks like the survivors haven’t learned, either.
“They still are wrapping dollar bills around these things. Have they learned their lessons? They have to an extent, but these lessons have been out there for 15 years. It’s basically supply and demand, and supply continues to come in extra strong. I don’t think it’s going to stop,” said Lewis.