Sales of semiconductors will surpass $300 billion in 2010 due to a quicker than usual rebound following the downturn of 2009.
Malcolm Penn, CEO of Future Horizon, said it had revised its forecast upward for the year, but he warned that short sighted and risk averse CEOs could rock the boat and allow the industry to enter another "trash cycle".
Penn said: "There's no algorithm that correctly forecasts how the semiconductor industry will perform. The semi market is driven by the hog cycle and cobwebs, that is to say by investment and lead times."
The problem is the huge supply lead times, he said, the minimum is four months. "Supply is as fickle as a young girl's dreams," he sai and there's nothing the semiconductor industry can do about it.
Decisions are driven as much by fashion as by fact, he said. The current market boom and the 2009 bust is not a normal industry boom-bust cycle. On the face of it, the industry is in a market boom because the market will grow this year by 34 percent, following a 10 percent bust last year.
This time around it's different. The numbers the industry is seeing are nothing to do with the market itself. "The industry did a lousy job managing the experience - it was business as normal followed by a crash," he said.
He described 2010 as a restart not a boom, and 2011 will herald a return to normality The chip market lost three calendar quarters out of its life. "I really do believe you've got to look at it from the point of view we went into suspended animation for nine months and when we woke up things were exactly as they were before."
Because of the credit crunch, said Penn, the industry took out 15 percent of its capacity during the three quarters pause. The industry kept cutting back between the second half of 2009 and the first quarter of 2010, including both fab capacity and headcount. And it carried on cutting back, laying off people and closing factories nine months after things were getting back to normal again.
Now everyone has cut back, the industry has a deep problem, said Penn. Before the Lehman Brothers collapse there was a strong world economy, strong unit demand, and tight wafer fab capacity with no excess inventory back in Q4 2008. Average selling prices were recovering. In the first half of 2008 and companies like TSMC had already cut back their capital investment. The price wars were over and capacity was under control.
Two years later, he said, there's strong unit demand, no excess inventory, double ordering - which isn't double delivery. There's tight wafer cab capacity down 14 percent compared to Q3 2008, said Penn. "It does not get more sold out than that. Forget about this year, you're stuffed. There will be 10 people waiting for that one IC you've got."
Penn forecast that ASPs will continue to trend up and the market is set to bust through the $300 billion threshold on December 14th, 2010. "I don't know what time of day it will be," he said. Pre-Lehman, the chip fundamentals were in good structural shape. The semi industry is starting the rebound with shortages, and capital spending is up but it's too little and too late, he said. Most of the actions the industry took were knee-jerk and nuclear. "There will be many Nissans to come in the next few months," he predicted.
And while chip companies are making lots of money, they're not spending it. "If the global economy tanks, the chip industry will follow it," he said. There are so many uncertainties in the supply chain it makes it difficult to get a handle on what is the real unit demand, he said. "Unit demand is unpredictable and that gives a problem what you're supposed to build. The semi companies are aiming wildly, so when supply problems happen, it's because of a decision made four months ago. The long term trend is extremely stable for unit demand at 11 percent per year."
Penn said the industry doesn't even know who its customers are - the top three are HP, Samsung and Nokia, but, he said, the next seven can't be agreed on. The top 10 percent have 30 percent of the market but the industry has no idea who the other 70 percent of the market is, he said.
Far from being mature, the chip industry is immature, is still growing, and is still fragmented. He said that over the long term, fab capacity has to match unit demand. "It comes to a head at 450 nanometre where the semi guys are saying yes, and the equipment guys are saying no way. They're like a couple of schoolkids. The argument is about who pays. Trade associations are supposed to sort these things out," said Penn.
And the next trash cycle will be triggered by excess capacity, he said. Future Horizon's forecast for 2011 is 14 percent, he said based on a very modest growth in the industry. But because the forecast is 14 percent for 2011 compared to 34 percent this year, that doesn't mean that 2011 is a bust cycle.
Penn said that semiconductors are strategic to economic growth, "they're not like coffee, tea, and stationery". As far as geographies go, said Penn, Taiwan is virtually unstoppable and the same is true of Korea. The USA has more or less given up with the exception of Intel and Micron, while European firms don't know what to do.