Semiconductor inventories under control

The semiconductor market is currently in a slow growth period. After 10% growth in 2014, the market is expected to only show low single-digit growth in 2015. Our own forecast at Semiconductor Intelligence is 1.5%. In several previous market slowdowns, inventories in the channel have climbed as some companies were slow to adjust their inventories to match lower demand levels.

The chart below shows total inventory as a percentage of quarterly revenue for five of the top six semiconductor companies. Samsung is not included since it does not disclose inventory data for its semiconductor business. Most of the companies show no significant change in the inventory ratio over the last six quarters. The exceptions are Intel and Qualcomm. Intel’s ratio went from 29% in 2Q 2014 to 37% in 2Q 2015. This is primarily due to lower revenues, with Intel’s 2Q 2015 revenue down 5% from a year ago. Qualcomm’s ratio climbed from 24% in 2Q 2014 to 41% in 2Q 2015. Qualcomm’s 2Q 2015 IC revenue was down 22% from a year ago due to increased competition for its smartphone chipsets.


Are inventories at electronics companies getting out of alignment with revenues? The chart below illustrates total inventories as a percentage of quarterly revenues for key electronics companies. The companies are six of the top eight purchasers of semiconductors, according to Gartner. The other two are Dell, which is now private, and Huawei, which does not disclose inventory data. The inventory to revenue ratio varies significantly from company to company, with Apple averaging about 4% and Sony ranging from 30% to 50%. These differences are due to factors such as number of product lines (relatively few for Apple, numerous for Sony) and supply chain strategy. Some companies (such as Sony, Samsung and Lenovo) tend to build inventory in the third quarter in anticipation of stronger fourth quarter sales. None of the companies show any significant change in their inventory ratio for 2Q 2015 compared to a year ago.

EE inv

The links in the semiconductor supply chain which usually show the largest variation in inventories are distributors and electronic manufacturing services (EMS). The chart below displays the ratio of total inventories to quarterly revenues over the last fifteen years for major distributors and EMS companies. The two largest semiconductor distributors, Avnet and Arrow Electronics, are used for the distributor ratio. Each company has over $20 billion in annual revenues. The EMS companies are Jabil, Sanmina, Flextronics and Celestica. Hon Hai (Foxconn) is the largest EMS company, but it does not disclose inventory data for its EMS business.

EMS inv

When the Internet bubble burst in 2001 the semiconductor market plunged 32%, following strong 37% growth in 2000. Distributors’ inventory ratio peaked at over 80% from the low 60% range in 1999. The distributors did not reduce their inventories quickly enough to match the decline in revenues. Since 2001, the distributors have done a better job of managing inventories. For the last eight years their inventory ratio has held at close to 40%.

The EMS companies were caught by surprise by the semiconductor downturn. Most of these companies did not become significant factors in electronics manufacturing until the 1990s and did not experience the previous double-digit semiconductor market downturn in 1985. Their combined inventory ratio ballooned to over 70% from below 50% in 1999. Flextronics, the largest EMS company at the time, saw its ratio double from 44% in 2Q 1999 to 87% in 1Q 2001. The EMS companies reduced the ratio to 39% in 4Q 2004. As the semiconductor market slowed from 28% growth in 2004 to single digit growth in 2005 to 2007, the ratio jumped to 55% in 1Q 2007. Since 2007 the ratio has been fairly steady, even through the 2008-2009 semiconductor downturn. In the last few years the ratio has risen slightly from about 50% in 2011 to 57% in 2Q 2015. This latest increase in the ratio is likely due to deliberate plans to run higher levels of inventory following conservative inventory levels in 2010 and 2011.

Semiconductor inventories appear to be under control throughout the semiconductor device supply chain. Thus companies are making adjustments for the slowdown in the semiconductor market. Companies walk a fine line between carrying too much inventory – which can become a major burden when demand falls off – and too little inventory – which can lead to missed sales when the market is growing. The improved inventory management is largely due to better inventory management systems and better communications between semiconductor suppliers and the buyers of their products: electronics companies, EMS companies and distributors.

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




Gartner, Nov. 2014



McKinsey, Dec. 2014



Business Insider, April 2015



PwC, May 2015



IDC, June 2015



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



Analysis Mason, Sep. 2014


Business Insider, May 2015


IDC, June 2015



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.


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.