Economy
The semiconductor industry sets the pace of global economic growth. Just as the industry's strength provides a leading indicator of the world's economic health, advanced semiconductor products and systems are bringing new opportunities, growth, and development to countries around the globe.
The Growth Cycle
The semiconductor industry enters 2005 in the midst of a turning semiconductor market. After the global downturn of 2001 and flat sales in 2002, strong second half growth in 2003 yielded an 18.3 percent revenue gain to sales of $164.4 billion. Momentum accelerated in 2004, making this past year once of the best on record for the semiconductor industry. Propelled by a year-on year growth rate of 28 percent, global sales were $213 billion in 2004, surpassing the previous record of $204 billion reached in 2000.
Long-Term Growth Slows to 8-10 Percent
From its inception, the semiconductor industry has been cyclical. Cycles typically included two strong years of 20 percent growth, one year of slow growth, and one year of flat or declining growth.
Overriding these cyclical waves, however, was prodigious growth: the industry achieved a 16.1 percent compound annual growth rate (CAGR) from 1975 to 2000. Growth during this period was driven by technological advances, the increasing pervasiveness of electronics in society, and the increasing capability of the semiconductors that powered new products and systems.
This growth rate began to slow gradually starting in the mid-1980s, reaching about 15 percent in 1998. The severity of the 2001 downturn then prompted a re-evaluation of the industry's long-term growth rate. With semiconductor sales of $213 billion in 2004, the rate is now expected to be in the 8-10 percent range. The Semiconductor Industry Association forecast, released in June 2005, reflects this consensus and predicts a CAGR for the industry of 9.2percent from 2004 to 2008.
The Global Consumer - Transforming the Semiconductor Industry
Our industry has experienced a profound transformation. In the 1960's, when the semiconductor industry first emerged from anonymity, the key driver of the industry was the government and aerospace sector. Major applications were the Apollo space program and weapons systems such as the Minute Man intercontinental ballistic missile.
With the end of the Apollo program and the cuts in the defense budget after the Vietnam War, the key driver of the industry shifted in the early 1970's to the corporate Information Technology (IT) sector. The introduction of the IBM 360 (the first use of integrated circuits in a computer) and the mini-computer initiated the first IT boom in the late 1960's and early 1970's.
Corporate IT continued to dominate spending in the 1980's. With the introduction of the PC and Local Area Networks (LAN's), corporate IT grew to 60 percent of demand, while the government/aerospace sector declined to less than 10 percent of demand. Consumer products continued to gain in importance with the introduction of new products such as video games and the VCR.
In the 1990's, consumers emerged as the primary force driving semiconductor sales. If "consumer products" are defined as products purchased by individual consumers with their own money, consumers now drive roughly half of all semiconductor sales. With the Internet boom and declining PC prices, individuals now consume more than 30 percent of units sold in the PC marketplace. Consumers dominate the cell phone market, more than 10 percent of end semiconductor demand, by commanding more than 90 percent of sales. The automotive segment is similar. Semiconductor suppliers will need to refine their view of global markets, as the technology buyer of today may be a teenager listening to a MP3 player, while text messaging and sending pictures on a cell phone. Just as the corporate IT sector once largely determined spending, the global consumer now dominates the technology spending of the early 21st century.
A Truly Global Marketplace
In the 1980s, Asia was primarily a place for low-cost semiconductor assembly and low-end consumer electronic product sales. Today, the region not only leads in electronic equipment production-from low-end to advanced products-but it is also a significant consumer of sophisticated electronics. China is now the largest market for cellular handsets, representing 20 percent of demand, and the second largest market for personal computers. South Korea has the most advanced nationwide cellular network in the world. The electronic equipment and semiconductor industries have evolved into a truly global market.
The Outlook: Six Percent Increase in 2005 at Record Levels and Continued Growth in 2006
Revenue growth in the semiconductor industry in 2005 will be up 6percent from 2004. This is a usual trough year of the cycle, particularly in contrast to 2001's 32 percent revenue decline. Without the volatile memory sector, which will fall 6.3 percent in 2005, semiconductor sales would actually rise 9.5 percent in 2005. 2006 will see an acceleration in growth to 8.8 percent and revenue of $246 billion. In 2007, the industry will exceed $250 billion in revenues for the first time, posting 11.0 percent sequential growth in sales to $273 billion followed by 13.5 percent growth to $303 billion in 2008. This is a remarkable advance for an industry of this size.
Three factors are contributing to the shallow trough of 2005: inventory management, capacity, and resilient end markets.
As soon as excess inventory began to accumulate in the supply chain in the second quarter in 2004, companies throughout the electronics supply chain reacted effectively to reduce inventories, in contrast to the inventory accumulation of previous cycles. Instead of the ten quarter resolution of the previous cycle, excess inventory is out of the supply chain within three quarters, ending in the second quarter of 2005. The lack of inventory is in addition to normal seasonality for the outlook for stronger growth in the second half of 2005.
Capital spending has also been restrained in this cycle, representing 21 percent of sales in comparison to 2000's 30 percent spending level.
In contrast to 2001, end market unit growth will largely slow in 2005, rather than decline, with some pockets of strong growth, as follows:
Consumer Market
In the consumer area, with the emergence of Digital TV-which contains higher semiconductor content than standard TV's-unit sales should rise 65 percent in 2005, above the 47 percent growth of 2004.Communications Market
In the wireless communications market, unit growth in handsets will slow from 30 percent in 2004 to 13 percent in 2005, still driven by 2.5G and 3G handsets, whose semiconductor content is 25 percent higher than previous generations, to support digital cameras, color displays, and wideband data capability.PC Market
The personal computer market should slow to 10 percent unit growth from 14 percent in 2004, as corporations complete the Y2K upgrade cycle, but consumers continue to adopt new applications such as streaming video and broadband connectivity.
Transforming Industries, Economies, and Societies Worldwide
Advances powered by semiconductors give businesses and consumers new flexibility, freedom, and opportunity. Activities that once confined people to the home or office can now be performed at any time any place, almost anywhere in the world. The semiconductor industry is bringing new opportunity, socio-economic advance and new human development to nations and societies around the world.
