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Chip industry on the rebound
By Tony Sitathan

http://atimes.com/atimes/Global_Economy/FE13Dj02.html

SINGAPORE - The Semiconductor Equipment and Materials International (SEMI) exhibition held in Singapore last week seemed to reflect the state of the global semiconductor industry: global recovery on the back of record sales. Indeed, the industry is expected to outperform sales recorded in the previous two years and post more than US$210 billion in global semiconductor sales for 2004 alone.

This recovery is largely based on a recent surge in demand for semiconductor equipment and materials. As a sign of what's to come, global semiconductor unit shipments climbed to record-breaking highs of more than 100 billion units in the final quarter of 2003. And the overall pick-up in sales has prompted semiconductor equipment makers and materials manufacturers to increase their capacity to meet the rising demand.

Stanley T Myers, president and chief executive officer of SEMI, says the semiconductor market is forecast to see double-digit growth this year, with the equipment market expected to grow 39 percent and the materials market forecast to expand by 11 percent.

"This year is no doubt a year of growth as strong fundamentals are in place," Myers said. "However, it's hard to predict strong growth for next year as we may see [a] possible contraction in growth for semicons by late 2005, but demand should still add up positive."

For George T Lin, president of SEMI Southeast Asia, the rebound in the semiconductor industry already was evident by the number of companies represented at the SEMI exhibition on May 4-6 and the total stand space taken up for the show.

This bodes well for those involved in the industry, but analysts warn that riding the demand wave can be a challenging task, not just for wafer foundries, but for semiconductor equipment makers as well.

"In 2002-03, there was significant underutilization. Now it's a reverse situation where there is almost a 95 percent fab-utilization capacity. There is currently more demand than supply," said Len Jelinek, a principal analyst for semiconductor manufacturing and supply at iSuppli Corp, a market-research consultancy based in the United States.

Jelinek pointed out that the economic difficulties of the past have made the wafer foundries lean, and there is now a lack of ready capital to be mobilized for quick expansion. He predicted that semiconductor factory utilizations will be limited to about 5-7 percent in 2004, which could pose constraints on the industry's ability to meet the growing demand.

However, the increased chip demand for the consumer, wireless and personal-computer (PC) markets has now become more widespread, and with worldwide economic recovery fueled by soaring US and Chinese imports, the market has shown some sustainable economic growth.

Jelinek says China will play an increasingly greater role in the global semiconductor market. Last year it contributed close to 4 percent of the world's semiconductor output, and by 2007 it is expected to contribute closer to 9 percent. China's overall capacity is set to increase as foundry service providers expand their operations to meet forecast global and domestic demand, especially for the 200-millimeter wafer technology.

This renewed optimism also is being felt in Singapore. According to a recent Economic Development Board (EDB) survey on business expectations related to the state of the manufacturing sector in Singapore, all signs point to renewed optimism among electronic manufacturers; at least 67 percent of manufacturers expect robust business performances for the next six months of the year. This positive outlook is broad-based, ranging from electronic component to end-product makers. The semiconductor firms are the most upbeat, as they expect orders to be boosted by the rebound in chip demand, especially chips used in communication and consumer electronics products.

From the survey of 400 manufacturing respondents, which had a 93 percent response rate, 35 percent of the manufacturers foresee higher levels of production, 27 percent anticipate more orders, and 24 percent expect higher exports in the second quarter of 2004. In addition, 82 percent of the manufacturers plan to invest in plant and machinery over the next 12 months, while 31 percent have indicated intentions to increase their capital expenditure. In terms of employment, 10 percent of the manufacturers expect to hire more workers in the second quarter of 2004. The semiconductor segment in particular expects to increase production to meet the rising export demand.

Within the infocomms and consumer electronics companies, a higher output of mobile phones and computers is expected. Singapore's demand for semiconductor chips was worth an estimated $3.3 billion in 2003 and may exceed $3.8 billion for 2004. It is forecast to reach $4.7 billion by 2007.

Reginald Wee, head of electronics and precision engineering for EDB, says Singapore aims to take advantage of the boom in the semiconductor industry. "We want to build a front-end support industry that takes advantage of Singapore's ability to provide cluster development services, including infrastructure, logistics and distribution support to the semiconductor industry," Wee said. "Even if we get [only] 10 percent of the $30 billion semiconductor equipment manufacturing pie, we would have succeeded in the long run."

But will this bull run in the semiconductor industry last, or even pick up more momentum? Several electronics analysts and market-research companies warn of overcapacity, or supply outstripping demand, in the second half of 2005. Many of them, including iSuppli, maintain that there could be some corrections in inventory levels, causing the industry to slow down to reflect only 1.7 percent growth by 2006. IC Insights, another market-research firm in the US, has predicted a slowdown of negative 5.0 percent for the semiconductor industry as early as the third quarter of 2005.

An accounts manager in the device manufacturing systems department at Hitachi High Technologies in Singapore maintained that it's good to be optimistically cautious when it comes to the semiconductor industry.

"The semiconductor industry has cyclical highs and lows built into the system. Now we seem to be enjoying a boom period, so we must also anticipate the low period, and then anticipate the turnaround. The trick is to anticipate the turnaround, that is the period [when] we are all in business. So for the time being, we seem to be riding a strong wave in the semiconductor industry. Let's hope we don't fall over too soon," he warned.

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