Electronics production growth has turned positive in 2014 for all key geographic regions. The graph below shows three-month-average change versus a year ago for electronics production in local currency through April 2014. Total industrial production is used for Europe (EU countries) and South Korea since electronic production data is not available. The data is from government sources.
China continues to show strong growth in electronics of 10% or higher. Taiwan electronics was in a significant decline throughout 2012 and 2013 but returned to growth of 5% in April 2014. Japan electronics experienced a major decline following the March 2011 earthquake and tsunami. Japan’s electronics growth has been positive since November 2013, ranging from 4% to 8%. U.S. electronics went from positive growth in 2012 to declines of 1% to 7% in each month of 2013. The U.S. turned positive in January 2014, showing growth in the range of 2% to 4% through April. Europe’s industrial production followed the same general trend as U.S. electronics, turning positive in October 2013 and growing about 3% in each month of 2013. South Korea’s industrial production oscillated between positive and negative in 2013, but has been positive since December 2013.
Two key drivers of electronics and semiconductor growth over the last few years have been smartphones and tablets. The growth rate of these products has been slowing over the last several quarters. Tablets have slowed from over 100% year-to-year growth in 2012 to only 4% in 1Q 2014, according to IDC. Smartphone growth has decelerated from close to 50% in 2012 and the first half of 2013 to 24% in 4Q 2013 and 29% in 1Q 2012.
Despite the slower growth in the last few quarter, both tablets and smartphones are expected to show healthy growth for the year 2014. Gartner expects tablet growth of 39% and NPD DisplaySearch projects 26%. IDC lowered its forecast in May to 12% from its March forecast of 19%. IDC expects large display smartphones to take away some of the potential market from tablets. Smartphones are forecast to grow between 24% and 34% in 2014 according to Gartner. IDC is projecting 19%.
What is the next big driver of growth for electronics and semiconductors? One potential answer is the further evolution of computers and mobile phones into a single device to handle most of people’s computing and communication needs. It will probably several years of technological and design innovation before this type of device becomes mainstream.
In the near term several applications will help stimulate electronics and semiconductor growth:
- Automotive production has grown steadily over the last four years. Safety, entertainment, navigation and communication applications are driving increasing electronics and semiconductor content in automobiles.
- Television sales will see higher growth as more consumers purchase Ultra High Definition (UHD or 4K) TVs. However the high prices of UHD TVs will limit the market to early adopters for a few years.
- Wearable devices for tracking fitness and health are becoming popular. The market for these devices is currently small but fast growing.
- The “internet of things” (IoT) is getting a great deal of publicity. Basically it refers to connecting a wide range of devices to the internet to be remotely monitored and controlled by a PC, tablet or smart phone. Home security and energy management are two key IoT applications which are seeing acceptance in the market. However some of the proposed IoT applications seem to be a technology in search of a need.
The current outlook for electronics and semiconductors is good based on production statistics. Traditional and emerging devices should be able to sustain growth for at least the next few years. Our May forecast at Semiconductor Intelligence was for semiconductor market growth of 10% in 2014 and 9% in 2015. This forecast certainly looks achievable based on recent trends.
The first quarter 2014 semiconductor market was $78.5 billion, down 1.8% from fourth quarter 2013 and up 11.4% from a year ago, according to World Semiconductor Trade Statistics (WSTS). The year-to-year growth was the highest since 4Q 2010. The year-to-year growth has been accelerating for the last four quarters. Our February forecast at Semiconductor Intelligence was for 10% semiconductor market growth in 2014. This forecast is dependent on healthy quarter-to-quarter growth of 5% or higher in 2Q 2014 and 3Q 2014. The table below shows 1Q 2014 (or nearest fiscal quarter) revenue growth for major semiconductor companies and their guidance for 2Q 2014.
Most companies (9 of 15) reported revenue declines in 1Q 2014 versus 4Q 2013. Of the companies providing guidance, 11 of 12 expect revenue increases in 2Q 2014. Micron expects a decline in 2Q 2014 due to both declining memory prices and declining bit shipments. For the other companies the expected revenue increases range from 0.7% to 12%. The weighted average revenue growth for the above companies in 2Q 2014 is about 3%. Several companies provided a range of guidance, with the midpoints shown in the table above. The high end growth guidance ranges from 6% for Intel, Broadcom and AMD; 7% for Qualcomm; 8% for Infineon and NXP; and 14% for Texas Instruments. The higher guidance points toward a potentially strong 2Q 2014.
A robust 2Q 2014 could help drive year 2014 semiconductor market growth into double digits. Will this momentum carry into 2015? Below are forecasts for 2014 and 2015.
The forecasts for 2014 range from 4.1% from WSTS to 11.9% from Mike Cowan. We at semiconductor Intelligence are keeping with our February forecast of 10%. The trends for 2015 follow three distinct patterns. WSTS, Gartner and Semiconductor Intelligence expect 2015 growth to be similar to 2014. Future Horizons projects a strong acceleration from 8% in 2014 to 18% in 2015. Mike Cowan expects growth to decelerate from 11.9% in 2014 to 4.7% in 2015.
Semiconductor Intelligence’s forecasts for 2014 and 2015 are based on an improving economic outlook and continued growth of key end equipment drivers. The table below shows recent projections for global GDP growth from the International Monetary Fund (IMF) and growth rates for PCs, tablets, mobile phones and smartphones from Gartner and IDC. The IMF expects accelerating GDP growth in 2014 and 2005. Gartner projects PC units will continue to decline, but tablets should continue healthy growth. The combination of PCs and tablets are expected to show double digit growth in 2014 and 2015. Although overall mobile phone units are forecast to continue low single digit growth, smartphones will continue to be a major driver for semiconductors.
Spending on semiconductor manufacturing equipment is headed for healthy growth in 2014. The latest data from SEMI and the Semiconductor Equipment Association of Japan (SEAJ) shows March 2014 three-month-average billings for semiconductor manufacturing equipment were up 16% from February 2014 and up 31% from a year ago. Bookings were up 16% from February and up 18% from a year ago. The March book-to-bill ratio dropped to 0.93 due to a 46% surge in billings versus February from the SEAJ data. However the book-to-bill had been above 1.0 for the previous 15 months. In December 2013 SEMI forecast 23% growth in the 2014 semiconductor equipment market. The data through March indicates the industry is on track to achieve the SEMI forecast.
The robust growth in semiconductor manufacturing equipment in 2014 implies strong growth in overall semiconductor capital spending. However the guidance provided by the largest capital spenders in the industry point to lackluster growth. The three largest spenders (Intel, Samsung and TSMC) account for over 50% of industry spending. None are indicating significant growth in spending in 2014. Intel’s guidance ranges from a 2% decline to 7% growth, averaging 3% growth. Samsung expects 2014 semiconductor capital spending to be similar to 2013. TSMC’s guidance ranges from a 2% decline to 3% growth, averaging 1% growth. The average expected growth spending by the three companies is 1%. IC Insights’ March forecast was 8.4% growth in semiconductor industry capital spending. Gartner’s April forecast was 5.5% growth. Gartner forecast semiconductor capital equipment spending would grow 12.2% in 2014, about twice the rate of overall capital spending but about half the growth expected by SEMI.
We at Semiconductor Intelligence believe the semiconductor industry will show significant growth in 2014 in both overall capital spending and equipment spending. We expect capital spending growth over 10% and equipment spending growth over 20%. Companies will increase their capital spending targets as the year progresses. If this strong growth does occur, could it lead to overcapacity? This does not appear likely in the near term. The graph below shows industry spending on semiconductor equipment (from SEMI and SEAJ) divided by the semiconductor market value (from WSTS). The four-year-average ratio (red line) smooths out the year-to-year variations to show the general trend. The ratio was 20% in the overcapacity years of 2001 to 2002. The ratio dropped below 10% in 2005. Since 2007 the ratio has been in a steady range of 11% to 13%. The ratio in 2014 and 2015 is based on the SEMI equipment forecast (23% growth in 2014 and 2% in 2015) and the WSTS semiconductor market forecast (4.1% in 2014 and 3.4% in 2015). Under these assumptions, the industry will not experience overcapacity in the next few years.
The bigger risk is capital and equipment spending not keeping up with market growth. Our February forecast was for 10% semiconductor market growth in 2014. Assuming 10% growth in both 2014 and 2015 and no change in equipment spending in 2014 and 2015, the four-year-average ratio would drop to 10% in 2015, implying under-capacity. However we do not believe this will occur. We expect companies to increase their equipment purchases in response to solid market growth.