iSuppli Tempers Enthusiasm over 2010 Semiconductor Growth

Expect revenues in the semiconductor business to jump 21.5 percent this year over 2009, when the recession was in full swing, according to iSuppli analysts. However, when compared with pre-recession 2007 and 2008, the growth will be more modest, iSuppli predicts.

While the global semiconductor industry is poised to see significant recovery in 2010 when compared with the recession-riddled market in 2009, the increase in business will only be modest when looked at in perspective, according to research company iSuppli.

In a report issued March 5, iSuppli analysts said they expect revenues in the worldwide semiconductor space to grow to $279.7 billion in 2010, a huge 21.5 percent increase over last year's $230 billion.

However, given the impact the global recession had on all sectors of the IT industry, a more realistic comparison is with figures from 2007 and 2008, before the economy really hit the skids, according to iSuppli analyst Dale Ford.

In that light, the projected 2010 revenue figures are a less impressive 8 percent increase from $258.9 billion in 2008, and a 2.3 percent hike from $273.4 billion in 2007.

"Amid double-digit growth in revenue, rising prices, supply constraints and soaring capital equipment purchases, enthusiasm over the semiconductor industry's 2010 outlook has hit a fever pitch," Ford said in a statement. "However, conditions in 2010 appear so fantastic only in comparison [with] 2009. In reality, 2010 is likely to simply be a year when semiconductor industry growth on a sequential quarterly basis returns to a more normal pattern."

The semiconductor market in 2009 can be viewed as somewhat of an anomaly, according to Ford. In the past, when the semiconductor space struggled, it was due to factors within the IT industry, he said. For example, in 2001, such factors as the dot-com bust, excess capacity in the semiconductor space and a sharp decline in PC sales all contributed to a tough year.

It was different in 2009.

"Downturns in the semiconductor business historically have been driven by supply-and-demand dynamics within the technology market," Ford said. "However, 2009 marked the first time a downturn in the semiconductor industry was driven primarily by the macroeconomic environment. Seen in this context, the 21.5 percent annual rise in semiconductor revenue expected in 2010 actually represents a return to demand levels of 2007 rather than a dramatic growth surge."

Going into 2010, iSuppli analysts also cautioned against reading too much into other positive signs for the industry.

For example, while mobile phone makers have been complaining about supply constraints for some components, that has more to do with production constraints within the semiconductor market-manufacturers in 2009 cut production capacity and stopped buying equipment to adapt to the weaker economic conditions brought on by the recession-rather than a significant upsurge in sales, they said.

The analysts said with the recession beginning to release its grip on the economy, demand is returning to normal seasonal levels.

In addition, while semiconductor suppliers are raising prices in hopes of increasing their profits, pricing also has essentially returned to normal historical levels, analysts said.

And don't read too much into the expected increase in capital spending by chip makers on processor production equipment, iSuppli said. Again, when compared with 2009, spending on manufacturing equipment should increase 46.8 percent in 2010, a jump that will end three consecutive years of decline.

Compared with 2007 and 2008, though, spending levels in 2010 will be less than half what they were, the analysts said. In addition, much of the planned spending by the semiconductor manufacturers will be aimed at putting in place advanced technologies to support competitive positioning, rather than to meet growing market demand, they said.

There are other issues that also could limit the ability of the semiconductor supply chain to support stronger growth, including the need to bring assembly and test equipment production back up to capacity, and questions about whether semiconductor equipment suppliers can restore capacity to meet the demand for equipment.