Semiconductor Market to Slow Due to Economy: IHS iSuppli

IHS iSuppli analysts are lowering its projections for the semiconductor space as the global economy continues to worsen.

IHS iSuppli is the latest market research firm to cut its semiconductor revenue projections for 2011, citing the struggling economy and increasing consumer pessimism over the situation.

The firm said Sept. 21 that it now expects semiconductor revenue to grow by an "anemic" 2.9 percent, to $313.3 billion. In August, IHS iSuppli analysts had pegged growth at 4.6 percent.

The economic woes and consumer concerns come at a particularly bad time for the computer industry, according to Dale Ford, vice president of electronics supply chain and semiconductors for IHS iSuppli.

"Mounting economic weakness is taking its toll on the worldwide electronics and semiconductor industries just as these markets are entering the critical pre-holiday sales season," Ford said in a statement. "While economic challenges have persisted into 2011, consumer spending could have still sustained a reasonable level of growth in electronics demand if conditions had remained reasonably stable. Unfortunately, the accelerating decline and instability of the economy has reasserted itself as the primary driver of tepid electronics and semiconductor revenue growth in 2011.

The effect of the weak economy will roll over into 2012, with semiconductor revenue growth projected to be 3.4 percent, he said.

IHS' iSuppli's report comes a week after Gartner analysts dropped their semiconductor revenue estimates for both 2011 and 2012. Gartner cited continued slowing of demand for PCs and other consumer devices fueled by ongoing concerns about the stagnant economy, both in the United States and other parts of the world.

Gartner analysts now expect worldwide revenue in the semiconductor space for 2011 to come in at about $299 billion, a 0.1 percent decline from 2010. In the second quarter, Gartner had predicted a 5.1 percent revenue increase for the year. The third quarter, which normally is a strong one for the industry, could be relatively weak, according to Bryan Lewis, research vice president at Gartner.

"Semiconductor companies' third-quarter guidance is well below seasonal averages," Lewis said in a statement. "The current guidance by vendors points to flat-to-down third-quarter growth. Typically, we see guidance for 8 to 9 percent growth in the third quarter because of back-to-school and the holiday build. The supply chain is also showing significant slowdown, and semiconductor-related inventory levels are still elevated."

In a report Sept. 20, Gartner analysts reiterated their worries about high inventory levels for semiconductor suppliers, noting that continued weakening of consumer and business spending will leave inventory levels high.

"The semiconductor industry entered the third quarter of 2011 with moderately high levels of inventory," Gartner analyst Gerald Van Hoy said in a statement. "Current levels are too high given the weakening economic sentiment, and the industry must rein in production growth and take action to reduce accumulated inventory. We expect that these actions will occur during the next few quarters with production and sell-through expected to return roughly to balance by the second quarter of 2012."

IHS iSuppli analysts noted the declines in gross domestic products during the course of 2011 as an indication of the weakening economy. They also said the slowing growth in the electronics and semiconductor market this year echoes the drop the industry saw in the third quarter of 2008, which hit just as the global recession began to set in and which led to an 11.6 percent drop in semiconductor revenue in 2009. That said, semiconductor suppliers may be able to avoid a drop in revenue with smart business strategies.

"With the memory of the painful market contraction of 2008 and 2009 still fresh in mind, participants in the semiconductor supply chain are taking defensive postures and working to reduce inventories and production levels," Ford said. "Because of this, IHS still believes the semiconductor market can deliver weak seasonal growth that will support a low single-digit sequential expansion in semiconductor revenues in the third quarter that will prop up overall annual growth and prevent a decline in the market for the year."

The market could see a small boost in the second half of the year, thanks to the increase in demand and shipments following the earthquake and tsunami in March in Japan, the firm said. However, the analysts said they put the chances of another global recession at 40 percent, and said that if it happens in 2011, semiconductor market growth could be flat for 2011.

It also would lead to greater volatility in the market throughout 2012, a situation that wouldn't stabilize until 2013, the firm said.

Thanks to the growth of smartphones and tablets, semiconductor revenue in the wireless space will grow by 16.7 percent, IHS iSuppli said.