Thailand Floods, Inventories Hit Semiconductor Space: Analysts

Gartner and IHS iSuppli analysts are cutting their fourth-quarter semiconductor forecasts, citing the global economy, Thailand floods and high inventories.

Uncertain global economic conditions, the flooding in Thailand and rising product inventory are leading two market research firms to lower their expectations for the worldwide semiconductor market for the fourth quarter.

Analysts from Gartner and IHS iSuppli said in separate reports Nov. 17 that the semiconductor market-which includes everything from microprocessors and memory chips to digital signal processors, sensors and actuators-will slow during the last three months of the year before regaining momentum sometime in 2012.

IHS iSuppli analysts in September had projected market growth at 2.9 percent. However, in their Nov. 17 report, the firm lowered its forecast to 1.2 percent growth over the same period last year.

"Although the forecast of 1.2 percent revenue growth in 2011 is just barely positive, an expansion of any magnitude is significant from the standpoint of market psychology," Dale Ford, senior vice president, electronics market intelligence for IHS iSuppli, said in a statement. "Given the worsening economic environment and growing pessimism in the electronics supply chain, many market forecasters had projected third-quarter revenue would decline, and pull down the results for the full year of 2011. Even the prospect of marginal growth casts a much more optimistic light on the market performance for the year."

On the surface, the semiconductor space has been growing at a steady pace, IHS iSuppli analysts said. Microprocessor vendors like Intel, Advanced Micro Devices, Samsung and Qualcomm have all reported strong third-quarter financial results. Intel in October announced record revenue results for the sixth consecutive quarter, while AMD turned a profit a year after announcing a $118 million loss. The companies also are projecting solid fourth quarters.

However, conditions around the world are worsening, which will impact the semiconductor space, IHS iSuppli analysts said, predicting a 2 percent revenue decline from the third quarter. Microprocessors, image sensors and NAND flash memory are expected to be strong points-with revenue growth up more than 15 percent for the year-but that will be offset by problems in the memory space. Dynamic RAM, static RAM and NOR flash memory will all see revenue drops of 15 percent or more in 2011, and that market deterioration will continue into 2012, they said.

The earthquake and tsunami that hit Japan in March triggered a yo-yo effect on the semiconductor supply chain, damaging revenue in the second quarter. However, the aggressive work done by impacted Japanese semiconductor companies in response fueled revenue growth in the third quarter.

The flooding in Thailand will have a ripple effect throughout the market. Hard disk drive (HDD) shipments are expected to drop by 30 percent this quarter, which will lower PC shipments and impact the semiconductor space in the first quarter of 2012. The situation won't improve until HDD makers can recover from the floods and improve inventory levels.

Gartner analysts noted that many semiconductor makers announced weak third-quarter numbers and lowered fourth-quarter guidance, and they pointed to inventory levels as the key culprit. Vendors were aggressive in building up their inventories coming out of the global recession, and inventory levels in the supply chain were high going into the third quarter, and now the market is correcting itself.

"We expect that average selling prices [ASPs] for foundry-produced components will be under pressure through the first half of 2012 because of aggressive investment in capacity made as the industry came out of the last recession," Peter Middleton, principal research analyst at Gartner, said in a statement. "That investment is leading to excess capacity at the same time as concern is rising about end-market demand levels due to weak economic prospects."

Gartner's Index of Inventory Semiconductor Supply-chain Tracking (GIISST) methodology helps measure the health of the industry, according to analysts. A days-of-inventory (DOI) level above 1.0 indicates that inventory levels are high, which hurts ASPs. According to the GIISST, the DOI reached 1.16 in the third quarter, up from 1.12 in September.