The outlook for the semiconductor sector is looking increasingly tough as sales growth sputters to almost a halt in all but one area: mobility. The questions now are how long will it last, and can China or Intel’s next-generation Nehalem processor rescue the industry?
IDC has released its third quarter semiconductor numbers, showing decent unit shipment growth both year-over-year (YoY) and quarter-over-quarter (QoQ), but going forward, things are not looking good at all.
At the same time, Gartner released a report slashing its 2009 projections of revenue growth for the semiconductor industry from almost 8 percent to just one percent.
IDC found worldwide PC processor unit shipments for the third calendar quarter of 2008 grew 14.0 percent from Q2 of 2008 and 15.8 percent over the same quarter in 2007. Market revenue was up just 7.6 percent QoQ and 4.1 percent YoY to $8.3 billion. This reflects the continued downward pressure on average selling prices (ASPs).
Another reason for the price pressure is the advent of Intel’s Atom processor. Because it’s so cheap, it depressed the price totals. Without Atom, unit shipments grew 8.3% QoQ and 8.7% YoY.
“The PC processor market is of split mind right now,” said Shane Rau, director of semiconductors and personal computing research at IDC. “Memory grew in record shipments, which one would expect with higher seasonal demand. However, there were also signs of growth declining, and the outlook for Q4 and beyond is murky.”
Intel (NASDQ: INTC) held 80.8 percent market share in Q3, a gain of 1.1 percent, AMD had 18.5 percent, a loss of 1.2 percent, and VIA Technologies earned 0.6 percent, holding steady.
However, starting in September, a slow decline began, and it has accelerated in October. The initial signs came not from the chip companies but from foundries like TSMC, UMC and other chip manufacturing firms in Asia.
Rau said these firms cut back due to decreasing orders from customers, who were in turn getting fewer orders from retail customers and OEM partners. “Demand is being dialed back significantly,” he said. “Q4 will be murky because it’s supposed to be the best for the year. If it’s flat, that’s a disappointment, and if it goes down quarter over quarter, that’s a huge disappointment.”
A very slow 2009
Rau said he has dialed back on his 2009 forecast sales forecast to four or five percent unit growth, and most of that comes in mobility.
That’s downright optimistic compared to Gartner, which said worldwide semiconductor revenue growth in 2009 would be one percent, down from prior projections of 7.8 percent.
Although semiconductor companies mostly met expectations for the third quarter of 2008 with around five percent growth, guidance for the fourth quarter continues to slide to now just a two percent increase over 2007.
Gartner is projecting declines in growth across the board, with automotive going negative as the car industry suffers severe contractions. PC chips, which covers mobile, desktop and server, will drop from 14 percent growth in 2009 to five to seven percent. Cell phone chip sales will drop from nine percent to four or five percent, consumer electronics will shrink from 20 percent growth to 10 percent growth, and automotive chips will decline from 2008 levels by eight to 10 percent.
Those numbers may not jive with the revenue decline, but that’s because there will be pressure on ASPs, and more cheaper products sold instead of the more expensive ones, explained Amy Leong, research director for semiconductors at Gartner.
“When the economy is bad, the revenue goes down because people tend to go for the lower-end model,” she told InternetNews.com. “So the content per box is lower and there is typical pricing pressure. Everyone is fighting over the same business.”
The three bright spots are mobility, which continues to soar, netbooks, and incredibly, memory. “They have been bleeding for some time, so we do see some ASP recovery for DRAM and Flash. They just cannot get any worse. Plus, industry consolidation and a reduction in capacity should help for next year.”
Corporate spending has been cut back as much as personal and consumer spending, which is not helping the matter. “There is a strong correlation between profits and IT spending,” said Rau.
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What Will Save U.S. Chip Firms?
The problem is not just confined to the U.S., it is an international issue. “The U.S. is definitely in the worst shape, but we’re seeing even in Asia people are being very conservative in their spending. Europe is not pretty either,” said Leong. “Any growth to be had is coming from emerging markets, but it’s slow compared to last year.”
Rau said the Chinese market will continue to grow and be what keeps the U.S. afloat. “It may subside, but anybody will look at it and be envious of its numbers. China could carry us through the recession and be an indicator of when it’s over,” he said.
But Intel’s new Core i7, a.k.a. Nehalem, won’t be the savior for the market, nor will AMD’s Shangai server chip, both of which ship this month. Intel has finally lifted the NDA on testing results and reports from around the Internet indicate the i7 packs quite a punch.
The Core i7 is a significant new chip design from Intel that moves the memory controller onto the chip, thus eliminating the frontside bus, a major bottleneck in Intel chip performance. AMD’s (NYSE: AMD) chips have had this advantage for a while. Initial benchmarks are showing performance gains ranging from 20 to 40 percent, depending on the application.
But for now, people just aren’t buying. “I see Nehalem making an impact in 2010 when the economy begins gaining momentum again as corporate upgrades start, since they will be putting off their upgrades in the short term,” said Leong.
“I would find it hard to see any processor would stimulate market growth based on performance,” said Rau. “Performance doesn’t make a difference if someone buys a processor or not. It makes a difference in choosing one competitor over another. So they won’t drive a lot of growth.”