China: drag on global semiconductor market?

Three dimensional map of China in Chinese flag colors.

The Chinese stock market (as measured by the Hang Seng Index) dropped 11% from August 14 to August 24 over concerns of a slowing economy. In reaction, the U.S. stock market (as measured by the S&P 500) dropped 11% from August 17 to August 25. The China market has since rebounded 2% while the U.S. market rebounded 5%. Will a slowing China drag down the global economy? China accounts for about half of the
global semiconductor market. Will slowing semiconductor demand in China lead to a major slowdown in the global semiconductor market?

Chinese electronics production data presents a mixed picture as shown below. Unit production three-month-average change versus a year ago shows mobile phones went negative in March 2015. Mobile phones also went negative in 2012 before bouncing back to strong growth in 2013. PCs turned negative in September 2014, reflective of the weak global demand for PCs. Televisions were negative in December 2014 and May 2015, but have generally had modest growth in 2015. In contrast to the volatility of unit production, the overall change in electronics production (communications equipment, computers and other electronics) as measured in Chinese yuan has been steadier. Overall electronics production growth has been below 10% for the last three months after averaging 12% for the years 2012 to 2014.

China ee

Over the last ten years, China GDP growth has been gradually slowing down. Following double-digit growth in 2006-2007, GDP dropped to 9.6% in 2008 and 9.2% in 2009 – still strong growth especially since most of the rest of the world was experiencing a major recession. Growth picked back up to 10.4% in 2010 and moderated to 7.4% in 2014. The International Monetary Fund (IMF) projects China GDP will continue to decelerate to 6.0% in 2017 before increasing to 6.3% in 2019 and 2020. China electronics production growth (as measure in yuan) has averaged 4 percentage points above GDP growth from 2006-2014. Our forecast at Semiconductor Intelligence (SC IQ) is electronics will grow in the 9% to 10% range through 2020.

China gdp

Thus China should still be a major growth driver of the global economy and semiconductor market for at least the next few years. The behavior of stock markets is almost impossible to predict and difficult to explain. Stock markets are influenced by economic factors, short term computer trading, greed and fear. We believe the recent behavior of the China and U.S. stock markets are not a sign of a significant slowing of the growth of the Chinese economy in the next few years.

 

Semiconductor Forecast Update

The semiconductor market grew only 1% in the second quarter of 2015 versus the first quarter, according to World Semiconductor Trade Statistics (WSTS). Normally a strong quarter seasonally, this was the weakest second quarter since 2Q 2011. Our June SC IQ forecast was 5.5% growth for 2015 and 7.0% growth in 2016.

The outlook for the economy and key electronics has weakened in the last few months. The IMF expects 2015 world GDP growth of 3.3% in 2015, down slightly from 3.4% in 2014 and down two percentage points from the IMF’s April forecast of 3.5%. GDP is expect to improve to 3.8% in 2016. Gartner’s July projection was a 4.8% decline in combined PC and tablet units in 2015 compared to their March 0.4% growth. Gartner sees PCs and tablets bouncing back to 4.9% growth in 2016. Gartner’s July mobile phone forecast of 3.2% growth in 2015 and 3.5% in 2016 is down modestly from the March numbers of 3.5% and 3.8%, respectively.

 Annual Change 2014 2015 2016 Source
World GDP 3.4% 3.3% 3.8% IMF, July
PC + Tablet units 3.1% -4.8% 4.9% Gartner, July
Total mobile phone units 4.0% 3.2% 3.5% Gartner, July

In light of recent data and projections, we our lowering our SC IQ semiconductor market forecast to 1.5% in 2015 and 6.0% in 2016. Recent forecasts all point to weak 2015 growth, ranging from a decline of 1% from VLSI Research to 3.4% growth from Mike Cowan. For 2016, Gartner expects even weaker growth of 1.3%. Mike Cowan projects 5.3% and SC IQ is at the high end at 6%.

SC fcst Aug15

The outlook for the economy, electronics and semiconductors has weakened in the last few months. However signs still point to modest growth. 2016 should show improvement over 2015.

 

Internet of Things Bubble?

Speaking at the World Business Forum in Sydney, Australia in May, Steve Wonziak (cofounder of Apple) said about the Internet of Things : “I feel it’s kind of like a bubble, because there is a pace at which human beings can change the way they do things. There are tons of companies starting up.” According to market research firm Gartner, the Internet of Things (IoT) is “the network of physical objects that contain embedded technology to communicate and sense or interact with their internal states or the external environment.”

The obvious comparison to a potential IoT bubble is the Internet bubble in the 1990s. The bursting of the Internet bubble in 2000 put many marginal companies out of business and led to major declines in the stock market value of all Internet related companies. However it did not change the inevitable trend of the Internet becoming pervasive in our lives. The same is probably true of IoT. Some companies and technologies are overhyped and could crash and burn in a market correction. However the trend is inevitable – devices will increasingly communicate with the Internet, many without any human interaction.

How big with IoT be in the next few years? There is surprising agreement among forecasters.

Internet of Things Installed Base, Billions of Units

Source:

2019

2020

Gartner, Nov. 2014

 

25

McKinsey, Dec. 2014

 

26-30

Business Insider, April 2015

23

 

PwC, May 2015

 

30

IDC, June 2015

 

29.5

The consulting and market research firms are closer in their projections for 2019-2020 (23 billion to 30 billion unit installed base) than they are in their estimates of 2014 (3 billion to 10 billion). My theorem about high technology markets is the forecasters are always closer to each other than they are to the final reality. This is not surprising since the companies are operating with the same general set of assumptions. Unforeseen events often drive the market higher or lower than the consensus forecast.

The IoT is made up of numerous devices across many applications. The media focuses on consumer purchased devices such as wearables and connected home devices. The hype was obvious at International CES 2015 in January. The top two categories for exhibitor press releases were wearables and connected home.

However most of the IoT is driven by business and government. Business Insider estimates in 2019 about 74% of the IoT installed base will be business and government applications and about 26% will be consumer applications. IDC expects digital signage will be the biggest IoT growth driver in 2015. Businesses and government can usually justify IoT investment with eventual cost savings. A utility company can rationalize the cost of installing smart electric meters at their customer sites will pay off with the savings in not sending human meter readers to each location every month.

Consumer IoT applications will continue to command most of the media attention. Business Insider project about one-third of the 6 billion unit IoT installed base among consumers will be connected home devices, including energy, security and appliances. Another key consumer IoT driver is wearable devices which can monitor health, fitness and activity. They can also be an interface to a smartphone. Wearable devices are primarily worn on the wrist – including smart watches and bands.

Prognosticators are also remarkably close in their projections for the wearable device market in four years. Estimates of the 2019 wearable device market are in a narrow range of 145 to 156 million units.

Global Wearable Device Market, Millions of Units

 

2019

Analysis Mason, Sep. 2014

145

Business Insider, May 2015

148

IDC, June 2015

156

 

Two high profile wearable devices are the Apple Watch, launched on April 24, and the Fitbit Charge HR, launched on January 6 at CES. Fitbit is the global leader in wearable devices, with 34% share in first quarter 2015 according to IDC. The Apple Watch is being “watched” closely due to Apple’s success in redefining markets with its iPad and iPhone. Slice Intelligence estimates 3 million Apple watches were sold online in the U.S. in the three months from April 10 (the first day of pre-orders) through July 10. Slice Intelligence estimated Fitbit sold 850 thousand total devices in U.S. online sales in May, beating Apple Watch sales of 777 thousand devices. Apple Watch is expected to be a major factor in total year 2015 wearable devices sales, with estimated share of to 27% (CCS Insight) to 40% (Business Insider).

Apple watch 1
How will wearables affect the semiconductor market? IHS estimated the costs of the components in an Apple Watch Sport at $81. We at semiconductor Intelligence estimate the semiconductor portion of the cost at $50, 14% of the watch retail price of $349. IHS estimated the component costs of an iPhone 6 at $196. We estimate semiconductor content at $130 for the iPhone 6, 20% of the retail price of the phone.

Below are IDC’s recent projections of unit shipments of PCs, tablets/2-in1 devices, smartphones and wearables for 2019 compared to 2014. Smartphones will continue as the dominant device people use to connect to the Internet, with an expected 1.9 billion units shipped worldwide in 2019. The combined total for PCs and tablets in 2019 is 563 million units, a slight increase from 539 million in 2014. Wearable devices are forecast to show six-fold growth from 26 million units in 2014 to 156 million in 2019. Even with the strong growth, wearables shipments will be less than one-tenth of smartphones in 2019 and less than either PCs or tablets. The semiconductor content of wearables per device will continue to be significantly less than in the other devices.

iot

Earlier this month Gartner forecast wearable devices will account for only one percent of the semiconductor market in 2019. The total IoT semiconductor market will be more significant, with Gartner data showing it could account for eight percent of the semiconductor market in 2019.

The Internet of Things may not be the “Next Big Thing” to drive the semiconductor market, but it does represent a meaningful growth opportunity. The key semiconductor products in IoT devices are sensors, microcontrollers, processors and communication & connectivity devices. IoT devices will also drive a market for systems and infrastructure to support the devices. If there is an IoT bubble, it is more likely to slowly deflate than burst. Many companies currently focusing on IoT will go out of business, but the remaining companies will have an opportunity to profit from a strong growth market.

Growth drivers shifting to emerging economies

Global real gross domestic product (GDP) growth in 2015 is expected to be 3.5%, according to the International Monetary Fund (IMF) April 2015 report. 2015 is a slight acceleration of 0.1 percentage points from 3.4% growth in 2014. The IMF projects 2016 global growth of 3.8%, an acceleration of 0.3 percentage points from 2015. The table below shows GDP growth and acceleration/deceleration for advanced economies and emerging/developing economies. Key countries are listed under each category.

The advanced economies are expected to provide the growth acceleration in 2015. The United States, the largest economy accounting for about 23% of global GDP, is the largest contributor to the 2015 acceleration with GDP growth moving from 2.4% in 2014 to 3.1% in 2015 – accelerating 0.7 points. The Euro Area countries combined are the second largest economy and the second largest contributor to the global acceleration. Japan’s recovery from a 0.1% decline in 2014 to 1.1% growth in 2015 is the third major factor in accelerating GDP growth.

GDP Apr15

The emerging/developing economies as a whole are expected to show deceleration of 0.3 points, from 4.6% in 2014 to 4.3% in 2015. However these same countries drive the acceleration of global GDP growth in 2016 with 0.4 points of acceleration. Russia is in a major recession in 2015 with a forecast GDP decline of 3.8%, but begins to recover in 2016 with a 1.1% decline. Thus Russia contributes to global GDP acceleration in 2016 by being less of a drag on the economy than in 2015. South America shows a similar effect, led by Brazil and Argentina.

China has been a major driver of global economic growth for several years. Although China’s GDP is still expected to grow at almost twice the global rate, growth is projected to slow from 7.4% in 2014 to 6.8% in 2015 and 6.3% in 2016. India’s GDP growth is forecast to accelerate from 7.2% in 2014 to 7.5% in 2015 and hold at 7.5% in 2016. Thus India will replace China as the fastest growing major economy. The ASEAN-5 countries (Indonesia, Malaysia, Philippines, Thailand and Vietnam), the Middle East & Africa and Mexico also contribute to global GDP acceleration.

The overall message from the table is the advanced economies have recovered from slow growth in 2014 to close to long term growth rates in 2015 and 2016. The emerging/developing economies are still growing faster than the advanced economies, but growth leadership is shifting from China to India and Southeast Asia.

What is the impact on the electronics and semiconductor markets of these trends? The May 2015 smartphone forecast from market research firm GfK shows near term growth will depend on emerging regions, excluding China. Global smartphone unit growth is projected to slow to 10% in 2015 from 23% in 2014. China, a major growth driver and the largest single market for smartphones, is expected to show a 3% decline in 2015. The developed economies – North America, Europe and developed Asia/Pacific (APAC) – show growth slowing from 18% to 8%. The emerging economies – Latin America, Middle East, Africa and Emerging PAC – drive 2015 growth at 26%.

Smartphone Unit Forecast (Source: GfK, May 2015)
Millions of Units Change
2013 2014 2015 2014 2015
World 998 1227 1355 23% 10%
North America, Europe, Developed APAC 374 440 476 18% 8%
China 359 393 383 9% -3%
Latin Amer., Middle East, Africa, Emerging APAC 265 394 496 49% 26%

The PC unit forecast from IDC in May 2015 shows a 2015 decline of 6.2%. Mature markets show a slightly bigger decline of 6.6% compared to the emerging market decline of 5.9%. The emerging market decline is dragged down by China, which had an 8% decline in 1Q 2015 PC shipments versus a year ago according to government statistics.

PC & Tablet Unit Forecast (Source: IDC, May 2015)
Millions of Units 2014 2015 Change
World PC 308 289 -6.2%
  Mature markets PC 145 135 -6.6%
  Emerging markets  PC 164 154 -5.9%
       
World Tablet & 2-in-1 231 222 -3.8%

IDC’s forecast for tablets and 2-in-1 PCs is a 3.8% decline in 2015 following 2% growth in 2014. Tablet growth in 2013 and prior years exceeded 50%.

How will these trends affect the semiconductor market in 2015 and 2016? The slowing of key market drivers such as smartphones and tablets will limit growth for semiconductors. The first quarter of 2015 started weakly with a 4.9% decline from 4Q 2014, according to World Semiconductor Trade Statistics (WSTS). The outlook for 2Q 2015 revenue growth for key semiconductor companies is mixed, as shown below.

2Q15

Several companies are guiding for 2Q 2015 growth with around 3% at the midpoint (Intel, TI, STM and NXP). The highest growth rates are from Infineon at 9% and Avago at 7%. A few companies are expecting double digit declines (Qualcomm, SanDisk and NVIDIA). Weighted average guidance is about 3%, with a high end around 5%.

Our Semiconductor Intelligence March 2015 semiconductor market forecast was 8% for 2015 and 7% for 2016. Based on the weak 1Q 2015 and moderate expectations for 2Q 2015, we have lowered our 2015 forecast to 5.5%. We are maintaining our 2016 forecast of 7% based on some improvement in the global economy and slightly better prospects for the key drivers of smartphones and tablets.

The chart below shows recent forecasts for 2015 and 2016. 2015 forecasts are in a narrow range, from WSTS’ 3.4% to our 5.5%. Forecasts for 2016 range from WSTS’ 3.4% to our 7.0%.

Fcst June15

Overall, the outlook for the global economy, electronics and semiconductors is slow to moderate growth over the next two years. The risk is more on the downside than the upside. Factors which could lead to slower growth are more plausible than factors which could lead to higher growth. However the prospects of an economic downturn in the near future are low.