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Global chip making on a roll - to a
glut
By Macabe Keliher
TAIPEI
- A few years back, just before the technology bubble
popped, taxi drivers in key technology hubs such as
Hsinchu and Silicon Valley could be heard complaining
that business was abating at rates faster than the
latest microprocessor. Indeed, business travel was down
and deals were not being made. And then came the crash.
Fast-forward to early 2004, and
semiconductor-business travelers have been having a hard
time finding a taxi. At some recent electronics shows
the wait has been up to three hours. "I had to
reschedule my flight, but I was pleased to see all this
activity," said Tony Massimini, chief of technology at
Semico Research Corp, after failing to get a cab at the
Las Vegas Consumer Electronics Show last month.
From his years of observing the field, Massimini
has created what he calls a "taxicab barometer" for
judging how well the industry is doing by how well the
cab drivers are doing. "I believe if we pay attention to
various activities around us in our daily lives we can
get a good sense of what is happening, and not just rely
on cold hard numbers," he said.
And so, like
dogs barking before an earthquake, the taxicabs are
reflecting what the industry sees as a big upturn.
Semico's cold, hard numbers, for instance, forecast 26.8
percent revenue growth for the global semiconductor
industry this year to exceed US$200 billion, and 39.7
percent growth for the made-to-order-chip makers, or
foundries. Profits for some of the largest makers, such
as Taiwan Semiconductor Manufacturing Co (TSMC), are
being forecast at near $3 billion, for almost 60 percent
growth over 2003. "We can be reasonably certain 2004
will be quite good," said company chairman Morris Chang
last week at TSMC's investor conference.
Indeed,
not since the 1990s have the numbers been this good.
With the semiconductor fabrication plants - or fabs as
they are known - running at or near full capacity, and
customers such as Motorola double-booking orders out of
fear they will not get their chips to power their
cellular phones, the chip industry's visibility is
higher than ever.
Estimates put industry growth
for this year as high as 32 percent (VLSI Research Inc )
and foundry growth as high as 43 percent (IC Insights).
Both TSMC's and United Microelectronics Corp's fabs are
running at over 100 percent capacity, and Semico expects
a 30 percent supply shortage this year for the advanced
manufacturing processes. Recently, TSMC and UMC have
opted to forgo annual fab maintenance to free up
capacity to meet the onslaught of orders that have
suddenly arrived in the past few months. Furthermore,
wafer prices are reportedly up by 10-20 percent, and it
is taking three to four months for customers to get
their product.
Good times can't last
So good do times look that first-quarter
shipments this year are expected to exceed
fourth-quarter shipments from 2003, unprecedented in an
industry that peaks annually in December. TSMC's Chang
says first-quarter shipments will increase by single
digits for his company, and Nomura Equity Research also
forecasts single-digit-percentage quarter-on-quarter
shipment growth for the industry. "Demand from foundry
customers remains strong and there may be no seasonal
decline this year," said Rick Hsu, semiconductor analyst
at Nomura.
"The good news is that 2004 looks a
lot like 2000. The bad news is that 2004 looks a lot
like 2000," said G Dan Hutcheson, president of US-based
market-research company VLSI Research Inc, referring to
the boom cycle in 2000. At that time, strong electronics
demand and tight fab capacity appeared to promise
sustainable long-term growth. That led to
overinvestment, which in turn led to an excess of supply
just as demand began to taper off. Those combined forces
plunged the industry into a three-year rut from which it
is just now recovering.
The 1990s were the good
days of personal-computer (PC) craze and triple growth -
50 percent profit margins and soaring stocks that seemed
they would never fall. Just build a semiconductor
company and the orders would come.
All that fell
into a fiery funk in 2000, when everyone that would own
a PC had bought one already but manufacturers continued
to invest. Granted the electronics industry is cyclical,
but this was the first and only downturn over the past
decade in which companies clocked in negative pretax
income. The semiconductor industry got hit particularly
hard, experiencing prolonged declines in which the
industry saw negative 32 percent growth in 2001 and only
1.3 percent growth in 2002, and companies had negative
pretax earnings in both 2001 and 2002.
Although
the industry may grow by more than 30 percent this year,
and in the past long-term averages were around 20
percent, in the future 10 percent long-term growth
appears likely to be the norm - or maybe even single
digits. "There are just not enough drivers to drive the
whole industry like the PC once did," said Andrew Lu,
head of regional semiconductor research at Citigroup
Smith Barney.
When the current surge wears itself
out, probably next year, Lu says everyone will have to
settle in for years of slower growth in which only the
top-tier companies will maintain strong profit growth.
Where's the demand?
If that is the
case, and the industry is reflecting it this year, what
is the source of the demand?
Computer sales do
have a role in this upturn, albeit a smaller one. United
Bank of Switzerland (UBS), for instance, expects 11
percent growth this year in PC sales, and 25 percent
growth from notebook-computer sales. Furthermore, A "Y2K
upgrade wave" should be registering over the next few
years, according to VLSI. That is to say, the last big
computer upgrade was in 2000, and now, four years later,
companies are about due to get new machines.
Still, cellular-phone handset sales are forecast
to grow around 10 percent this year to more than half a
billion units. "The foundries' chip growth for handset
ICs [integrated circuits] will outpace that of PCs by
more than two times," said Chris Hsieh, semiconductor
analyst at ING.
The advent of color-screen
handsets and onboard digital cameras is driving sales.
Furthermore, the transition from 2G (second generation)
to 3G, which will allow more functions such as Internet
access, is expected to drive handset sales in the coming
years.
In fact, there is "no killer app
[application], just a lot of end markets finally
growing", said Steve Cullen, director of semiconductor
research at In-Stat/MDR, a US-based industry research
house. TFT-LCD (thin film transistor - liquid crystal
display) monitors and televisions are selling, as are
digital cameras and digital video disc (DVD)
recorder/players. Massimini found a plethora of products
at the consumer electronics show, leading him to
reaffirm Semico's position that "the recovery will be
driven by consumer and communications markets".
The billion-dollar earnings question, however,
is how long will strong growth in consumer and
communications markets last? When will consumers feel
that their tax rebate ought to be saved, not spent on
replacing their perfectly well-functioning TV, that it
is enough to use a cell phone to make calls, with no
need for Internet browsing, that their PC already has
more speed and power than they will ever use?
Excess capacity will glut the
market
Apropos of these questions, with
semiconductor manufacturers' capital expansion set to
grow in double digits this year, and equipment
suppliers' revenue growth expected to top 40 percent,
when will excess capacity glut the market? "With the
additional capacity that is expected to be added in the
latter half of 2004, the oversupply and reduced demand
will create a scenario for lower revenues," warned
Joanne Itow, senior analyst at Semico.
Too much
investment now is leading to overcapacity, which is
exactly what happened in 2000 - everyone is rushing to
build more capacity to fill orders and then there will
be too much capacity and not enough orders and crash.
TSMC will spend $2 billion this year, up from $1.2
billion in 2003, while UMC will increase spending by
more than fourfold to $1.5 billion. "Add on top of that
the possibility for China to overbuild ... and we now
have the potential for an oversupply situation," said
Itow. Chinese foundries are building enough capacity to
account for 20 percent or more of the foundry industry
in late 2005.
Still, even if this rebound will
be shorter-lived than in years past, analysts see
prospects of at least a year, maybe two, of good times,
in which there is enough demand to satisfy all of the
players involved and their extra capacity. "January
through June '04 we don't have to worry about
overcapacity," said Lu at Smith Barney. "But will demand
maintain the same pace in the second half?"
Of
course, no one knows, and even if it does, the extra
capacity may cause global headaches in 2005.
(Copyright 2004 Asia Times Online Co, Ltd. All
rights reserved. Please contact content@atimes.com for
information on our sales and syndication
policies.)
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