Gartner Dataquest Alert Indicators Point to Sustainable Semiconductor Market Recovery Positive leading indicators out of Asia/Pacific and Japan, as well as improved guidance from selected U.S. and European semiconductor vendors citing increasing demand and manufacturing utilization are worth noting as the semiconductor industry enters the second half of 2003. Gartner Dataquest is quite confident about our forecast of 8.3 percent growth for 2003. In fact, our current thinking is that this figure is looking a little pessimistic and that annual growth this year may well edge upward toward the high end of the 10 percent range (plus or minus a couple of points). Noteworthy improvements during the last few weeks confirm that the industry is continuing its recovery as expected and is about to enter a more accelerated growth phase. This is in line with our long-standing assumption of a three-phase recovery in the market as the next upcycle gathers momentum. Our third quarter 2003 forecast update is in the works, but likely revisions suggest cautious optimism for an improved industry outlook in the second half of 2003 and 2004. Noteworthy positive leading indicators include the following: Front-end semiconductor manufacturing: Silicon demand is increasing. Wafer fab equipment (WFE) revenue is forecast at 8.9 percent growth in 2003, a slight improvement on prior forecasts. Taiwan Semiconductor Manufacturing Company's (TSMC's) second-quarter results were stronger than expected. Its high-end capacity (0.13um capacity in Fab 6) is tight, with increased pressure from the industry to bring up more capacity at a rate much faster than projected. Overall wafer fab utilization is estimated to have climbed to 81 percent in the second quarter of 2003, a sequential rise of 4 percentage points from the first quarter. Foundry wafer demand in the second quarter mainly came from the PC notebook and consumer-related sectors, with strong orders coming from NVIDIA, ATI Technologies, Genesis, Via, Spectrum Software Services Group (S3G) and HiMAX (liquid crystal display [LCD] driver). The major driver is still very much within the graphic chips segment, although an improvement in demand is reported to have come from the Gigabit Ethernet application via Broadcom. 11 July 2003 2003 Gartner, Inc. and/or its Affiliates. All Rights Reserved. 1
Integrated circuit (IC) unit demand and shipments are on the rise again. On a comparative note, in 2000, the consecutive three-month period ending 31 May, total device units including discretes hit 89 percent of peak. Total IC was nearly 95 percent of peak. We expect IC unit shipments during 2003 to exceed 2000 peak sales. Peak is the highest three months of unit shipments of any consecutive three-month period in 2000. Back-end manufacturing: Packaging and assembly revenue growth for 2003 is now forecast at 26.5 percent compared with 21.5 percent previously. Packaging and assembly utilization rates for the overall industry continue to increase on a monthly basis. Second-quarter utilization crossed the 80 percent mark. Leading-edge utilization, defined as ball grid array (BGA), chip scale package (CSP), and flip chip packaging and processes, has become tight as the demand for advanced packaging solutions grows. Leadframe-based leadless packages (variations of CSP packages) are experiencing the fastest ramp up rate of any package previously introduced to the industry since the small-outline integrated circuit package (SOIC). Wireless and portable applications are adopting these as replacements for the larger, more-mature SOICs and many thin quad flat packages (TQFPs). Application markets: Gartner Dataquest's PC group recently revised its forecast for PC unit growth in 2003. The adjustment was a slight 1 percent to 2 percent growth in PC production for the 2003 forecast. Year-over-year revenue growth is now 2.1 percent. Year-over-year unit growth is now at 7.2 percent, up from the second-quarter forecast of 6.9 percent for 2003. Dynamic random-access memory (DRAM) spot market prices are up, PC motherboard production is up and rigid disk drive (RDD) orders for notebooks are up all auguring well for the long-awaited corporate PC replacement cycle. Several Japanese equipment and semiconductor suppliers cautiously indicate that demand is up for digital consumer products: DVDs, digital still cameras (DSCs), LCD televisions, as well as car navigational systems. Device markets: General-purposeanalogdevicesalesareimproving. Discrete device pricing has stabilized. NAND (a logical function meaning "not AND") flash is now in shortage and prices are increasing. Despite all this good news, however, the question remains: Is this just the beginning of a seasonal uptick or is the industry going through a second inflection ahead of an acceleration in growth? We believe the answer is yes on both accounts, yet there are still reasons to be cautious: The lack of a new, high-volume application driver hangs over the total semiconductor industry, further fostering doubts and conservatism. Visibility remains poor and there is reluctance by vendors to provide guidance past the third quarter. While mid- to high single-digit quarterly sequential semiconductor sales growth can be expected in the third quarter of 2003, visibility is still hazy in the fourth quarter of 2003. 11 July 2003 2003 Gartner, Inc. and/or its Affiliates. All Rights Reserved. 2
TSMC has increased capacity utilization from 67 percent last quarter to 86 percent this quarter, but United Microelectronics Corp. (UMC) is reporting a decline in June sales, and a cooling down in demand. Many world governments and central banks have been lowering interest rates hoping to stimulate consumer spending, suggesting that they see further sluggish demand in the coming quarters. Issues surrounding a natural gas shortage and a hike in energy prices in the United States may negatively impact consumer spending for the holiday season. Gartner Dataquest Perspective When Intel's Andy Grove was asked recently, "When will the semiconductor industry recover?" he replied, "When we least expect it!" It's a common trait among semiconductor industry professionals: When things are good, they can only get better, and when things are bad, they can only get worse. We believe that the industry is about to surprise us on the upside. There are a growing number of positive leading indicators and our forecast models suggest that a sustained upcycle will unfold during the next several quarters. There remain significant risk factors, not least of which is our assumption that improved business confidence will drive a corporate PC replacement cycle, but we believe that now is the right time to alert clients to the prospect of tightening supply, lengthening lead times and firmer device pricing to come. We advise semiconductor suppliers and buyers to review and, if necessary, modify and renew long-term supply and pricing contracts. Although major markets such as desktop PCs and cell phone handsets are transitioning from puregrowth markets to replacement markets, we believe areas of strengthening demand are emerging. Looking further out, a pipeline is filled with new and exciting innovations. As noted in Table 1, technology is not tapped out. Table 1 Technology Is Not Tapped Out Vertical Automotive Wired Communications Wireless Communications Storage Compute Consumer Industrial/Medical Military/Aerospace RFID = Radio frequency identification Source: Gartner Dataquest July 2003) Comment Unprecedented explosion in automotive electronics Massive broadband growth, but massive problems still Growth in location-based services, video and data Audio is done, but here comes video Mostly upgrade-cycle driven; some emerging markets Just two words: Digital Television RFID supply chain revolution/aging population Same old, same old 11 July 2003 2003 Gartner, Inc. and/or its Affiliates. All Rights Reserved. 3
Further updates on the industry and these innovations are available at Gartner Dataquest's upcoming Semicon West 2003 event on 16 July 2003 in San Francisco. By Richard Gordon, Mary Olsson and Klaus Rinnen 11 July 2003 2003 Gartner, Inc. and/or its Affiliates. All Rights Reserved. 4
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