The semiconductor cycles are over???

Semiconductor manufacturing capacity has suddenly become a big thing. Samsung this week announced it is investing $1bn this year, (with its competitors expecting that to be in flash rather than DRAM, hmmm) and Powerchip in Taiwan is also expecting to grow its DRAM sales 25% over the next quarter and growing capacity at 18% a quarter.
Usually the sign of a healthy industry, right? Unfortunately not. The semiconductor industry is cyclic and it’s just these big investments that tip the market over into decline (more capacity, lower prices, less return, some suppliers fold or merge). Now some say this doesn’t matter as the cycles have ended: “We used to do this 16, 17% growth per year and then went through this correction,” said Hossein Yossaie, CEO of Imagination Technologies.

“Now it will be a steady 8 to 12% for the foreseeable future. I believe that we will not see the cycle again and all the customers I talk to understand and agree.”

But Malcom Penn of Future Horizons disagrees strongly.

“It’s a quite popularist view,” he said.

“It has reared its head this time last year from the Semiconductor Industry Association and WSTS but there is absolutely no track record for it. Year on year over the last 5 years the market has been all over the place. I don’t see how you can say anything has changed as we haven’t had two consecutive years that have proved the argument, ever. It’s just pie in the sky.”
The key issue is there is still limited visibility of the inventory he says.

“Inventory adjustment is the big unknown,” said Penn. “So for a few quarters we might have relative stability but then the inventory and lead time issues come into play.”

He also points to 60 to 70% of chip sales being in the second half of any year, creating capacity issues through the year.”
The chief economist at ST Microelectronics sits between the two. “The last big peak was 2004 and usually there should be a big drop, but everything is looking at 7% growth,” said Jean-Philippe Dauvin, who is also on the WSTS world semiconductor statistics board.

“I recognise that now the cycle seems to be smoother.”

“But it seems that the cycles are within the year,” he said. “Now we are very much surprised to see the changes in each quarter and this creates the need for a lot of adjustments that are not easy to manage.”
But he is still cautious. “I see a much smoother cycle but I continue to be prepared for something to happen,” he said.
And it is the unexpected that will be the problem, says Penn.

“As the semiconductor market matures, an economic slowdown will automatically throw you into recession and that happens overnight and without warning,” he said.