Talk about a month of mixed messages! On the one hand, at a stroke the world's financial ecosystem became dysfunctional; yet on the other hand the chip industry continues to march on, says, Malcolm Penn, CEO, Future Horizons*.

Really, it was not so very long back, that we were all talking about how the chip market was beginning to hum again! In fact, Penn had also advised that now was not the time to cut back on the 2008 forecast!

Continuing in same vein, according to him, there were absolutely no surprises in the August WSTS data, with IC units up 9.3 percent on August 2007 (3.8 percent on July 2008) and ASPs down 9.0 percent versus this time last year, but up 2.2 percent on last month.

At the total semiconductor level, the results were even stronger. In short, the YTD chip market has kept trucking along; not for much longer though.

Were it not for the now disastrous economic big picture, Future Horizons' chip forecast message would still be positive and strong. Unfortunately it is not! Once again, the long-awaited industry recovery has had the rug pulled out from under it feet.

Watch out, there's a 2009 recession about; and there will be blood split on the market road ahead, Penn cautions!

Unprecedented events in global economy
The last four weeks have seen unprecedented events in the global economy. Not only has the industry to contend with all the 'normal' chip market challenges, the over-riding question on everyone's mind is "What in the hell is happening to the economy"?

Well, it is now 'official'. In its recently published October World Economic Outlook Report, the IMF has declared that the world economy is now "entering a major downturn" in the face of "the most dangerous shock" to rich-country financial markets since the Great Depression.

In the face of what it describes as "an exceptionally uncertain background", the Fund now expects world GDP growth to be only 3.0 percent in 2009, i.e., just a tad above the global 2.4 percent recession level and the slowest pace since 2002.

Their forecast for the advanced economies is even bleaker at 0.5 percent growth, with these economies already in recession. The outlook for the emerging economies is better, still growing strongly at 6.1 percent, but down sizeably on recent trends.

What has made this current slowdown so insidious is that it is a long time happening. World GDP growth for 2008 is still estimated to be an impressive 3.9 percent, down only marginally from July's 4.1 percent number but still higher than the 3.7 percent forecast in March and the 3.8 percent forecast this time last year. It is this resilience that we believe is keeping the near-term chip market (and WSTS numbers) growing.

Chip forecast at 4-6pc range
Early this year, during the IEF at Dubai, Penn had forecast a 12 percent growth for the global semiconductor industry, and that we were all dealing with an industry in 'deep trauma'!

However, soon after, the chip market started showing some signs of recovery and actually started to buzz again. This was in early June. Later, in July, the semiconductor industry numbers started indicating that this may not be a bad year after all! It also came to light that lousy memory numbers were holding back overall market numbers.

With the memory market not showing much signs of recovery, several analysts revised their forecasts in August and September, including Future Horizons. In early September, Penn had forecast that the global semiconductor industry would grow at 4-8 percent.

With a global slowdown now in place, Penn says that Future Horizons' January (and July) forecast assumptions, and chip market forecasts, are no longer valid. He adds, "We have not yet had chance to fully crunch the numbers, but at first sight, 2008 now looks set to come in at between 4 and 5 percent, with 2009 in the 4-6 percent range."

Penn cautions: "2009, however, could slip negative, depending on what happens to IC unit growth. At the moment we think this highly unlikely, given (a) the 6.1 percent advanced and developing market GDP growth forecast and (b) the fact there have only been two years of negative IC unit growth in the last 23 years, namely 1985 and 2001, both triggered by a massive inventory build."

While obviously, a slowing world economy is bad news for the chip industry, the coupling is not as strong as one might be lulled into intuitively believing. There have been seven instances in the last 22 years where the chip market has grown in value during a period of slowing economic growth and two occasions when the market has declined in a period of GDP growth.

IC units have exhibited three periods when they grew in the face of a GDP decline and five occasions when the units declined despite growth in the world GDP. The economy is, thus, not quite king; inventory, excess capacity and ASPs also play a role.

Underlying good news
The underlying good news for the chip industry is that all of the other industry trends are good. Inventories do not seem to be seriously bloated; wafer fab capacity utilisation levels are high; capital expenditure is low, and has been now for several quarters; and ASPs are in the midst of a long-term structural recovery phase.

Thus, while 2009 IC unit demand must inevitably slow, this slowing will coincide with an inevitable parallel slowing in new capacity additions, itself the result of a significant 2008 and prior Cap Ex cutbacks. The combined effect ought to be a relatively benign decrease in capacity utilisation rates, helping to cushion the inevitable near-term ASP pressures.

Looking at the near-term ASP trends, ASPs overall have been falling during 2008, but they have been falling much slower than the 2007 rate. This means that ASPs are actually increasing when measured on annualised basis.

Slowdown bound to impact ASPs
The economic (demand) slowdown is bound to negatively impact ASPs. What is more important from a market growth perspective however is not that they are falling but how fast they are compared with the same period last year. While the ASP recovery trend might wobble next year, the underlying trends still look good, providing the world does not slip into global recession.

The immediate world government policy challenge is thus to stabilize global financial markets, while nursing economies through a global downturn and keeping inflation under control. That is quite a steep challenge (it has never before been called upon to be done); the great danger being, aside from the risk of failing, is a return to vested self-interests and protectionism and the impact that this will have on globalisation and future world growth. There is a real danger this is the precursor of World War 3, with economics as the fire-power.

Penn advises: "Over a longer horizon, policymakers will be looking to rebuild firm underpinnings for financial intermediation and will be considering how to reduce cyclical tendencies in the global economy and strengthen supply/demand responses in commodity markets.

"The electronics industry would also do well to divorce itself from the financial market's casino driven addiction by starting to plan for its longer-term growth needs not the previous (and now seriously discredited) Wall Street greed/bonus-driven quarterly hysteria."

By: DocMemory
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