"The year 2010 is expected to close strong for the semiconductor and semiconductor equipment industries, as sales growth for both are forecasted to reach decade highs," said Mr. Montevirgen. "Consequently, we anticipate that most chip and equipment companies will experience multi-year high margins and exceptional earnings increases." Added Mr. Zino, "While we think there is still some room to grow, we project more modest advances ahead."
Below, they list their forecasts for these industries for 2011.
- We forecast that semiconductor industry sales will rise 7% in 2011. Considering recent forecasts from S&P Economics, research from industry and trade groups, and our bottom-up analysis of sales trends for the companies in our coverage universe, we see increasing unit shipments for key end-markets, such as computers, smartphones, and communications. We note these account for a large percentage of the semiconductor industry's demand. We expect industry sales to rise to nearly $320 billion in 2011 from an anticipated $299 billion in 2010.
- For 2011, semiconductor equipment sales growth should slow; we estimate that sales will rise less than 10%, after our projection for industry revenues to increase more than two-fold for 2010. Although the industry is experiencing a sharp rebound in sales this year, following an extended period of under-investing by semiconductor manufacturers, we forecast that growth will slow going forward, as companies digest recent capital expenditure purchases. We expect most demand for semiconductor equipment to come from more advanced technology nodes, as well as from larger memory customers and foundries looking to expand capacity.
- We project that capacity purchases will be driven by flash memory manufacturers, such as Toshiba and Samsung, given our expectation for stronger demand and tight supply in this sub-industry. We anticipate robust unit shipments for smartphones and tablets to be a major catalyst for these manufacturers, which should keep customer profitability at high levels. Unlike Dynamic Random Access Memory (DRAM), which relies heavily on PC demand, the flash memory market depends on a number of different applications and looks to us to be in better shape than DRAM on a comparative basis. The flash memory industry has emerging technologies, such as solid-state drives (SSDs), which should drive new demand.
- We see DRAM segment sales declining in 2011, following our projection for a more than doubling in capital spending in 2010. We believe the biggest growth catalyst for the DRAM segment in 2010 has been the transition from DDR2 (double data rate) technology to DDR3 (both DDR2 and DDR3 are types of DRAM chips that are found in personal computers). DDR3 technology is the successor to DDR2 and offers advantages such as lower operating temperatures, greater speed, and reduced power consumption. Now that DDR3 has become mainstream, we do not see any major catalyst boosting segment spending in 2011.
- We forecast that the Asia-Pacific region will make up 55% of semiconductor sales by the end of 2011. We see more semiconductor companies trying to make cost structures more variable by outsourcing manufacturing to third-party foundries. Leading Taiwanese foundries, such as Taiwan Semiconductor manufacturing (TSM 12 ***), have invested heavily in sub 40-nanometer manufacturing processes, which we believe will attract chip companies that do not have the capital to invest in such high-end manufacturing technology. Also assuming softer sales growth and less favorable tax incentives in Europe, as austerity measures continue, we see Asia continuing to gain global share.
- We expect the semiconductor industry's plant utilization rate to be around 90% by the end of 2011. We think the capacity utilization rate will fall from the current mid-90% range to the mid-to-high 80% range early in 2011, as chipmakers allow excessive inventory in the supply chain to digest. Although we see increasing capacity from recent capital expenditures, we believe that seasonal strength and a rebound in end-market demand in the second half will help keep plants busy through the fourth quarter of 2011.
- We forecast that the semiconductor industry's gross margin will widen modestly throughout 2011. Considering our view that chipmakers will start the new year by burning off excessive inventory, we expect first-quarter gross margins in the low-50% range, given lower plant utilization rates. However, we think orders will return to more seasonal patterns starting in the second quarter, and we expect margins to expand to the mid-50% area by the end of the year.
- We see semiconductor equipment manufacturers moving further into higher-growth, adjacent industries, namely solar, given our view that the semi conductor equipment industry is in the midst of a long-term secular decline. We believe pursuing new growth avenues makes sense given the similar processes and technology used within both industries. In addition, the solar industry has higher growth opportunities versus the more mature semiconductor industry, in our view. We believe companies, both small and large, will be looking to enter the solar arena, whether organically or through merger and acquisition activity. We expect Advanced Energy Industries (AEIS 14 *****) and Varian Semiconductor Equipment Associates (VSEA 37 ****) to be major beneficiaries of this trend because of their high investment in R&D within this arena.
- We think the semiconductor equipment back-end industry (packaging and automatic test equipment) will experience pressure to consolidate, given the segment's lower growth rates, high fixed costs, and lower profitability relative to other areas of the supply chain. We believe further consolidation of test equipment companies would facilitate cost savings through economies of scale and drive more effective factory utilization.
- We think Intel (INTC 21 ****) will finally gain some traction in the handset and tablet markets. With Intel's proposed acquisition of Infineon's wireless business unit (expected in early 2011), we see Intel instantly becoming a formidable competitor in the baseband segment of the handset market. We think Intel will successfully be able to cross-sell its Atom processor with the baseband chips, and we expect even more progress once it creates a single chip solution that integrates both functions. Additionally, we believe that Atom will find some success in the lower-end segment of the tablet market.
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