2007: modest growth

The past 60 years have seen some great "ups" and humbling "downs" in the chip business and everyone I talk to is breathing a sigh of relief that as an industry we had positive growth in 2007 after a dismal first half. As we wait for the books to officially close, it appears global semiconductor revenue will come in at $270 billion, a 3.5 percent increase over 2006, according to iSuppli, a semiconductor market research firm.

The first half of the year had everyone scared as global semiconductor revenue declined by 6 percent in the first half of 2007 compared to the same period in 2006. The cause of the first-half decline was attributable to drops in average selling prices of memory chips (NAND-type Flash and DRAM) due to a chip market glut resulting from heavy investment in memory manufacturing capacity in 2006.

However, the second half of 2007 saw the usual seasonal buying of chips for consumer electronics for back to school and December holiday shopping. This led to a 10 percent rise in global semiconductor revenue in the second half of the year as compared to the first half and stabilized the steady price declines of DRAM and NAND Flash, which everyone hopes carries over into 2008. The slowdown in DRAM production growth by manufacturers also contributed to the stabilization of chip prices. Strong fourth quarter 2007 cell phone and other personal electronic sales such as PCs and digital music players is where you will find most of these memory chips going. It's worth noting that while 2007 global revenue grew only 3.5 percent, unit growth is forecast to come in at 10 percent, according to IC Insights, marking a new industry milestone of six consecutive years of annual double-digit increases in units shipped.

Equipment

On the semiconductor equipment side of the business, in which Kokusai participates, the 2007 market was essentially flat compared to 2006 and will probably only register a 1 percent gain to $40.9 billion for 2007 when the final numbers are tabulated. This flatness should have been expected after a strong 2006 in which chip equipment revenue soared 23 percent primarily for increased memory capacity. 2007 chip capital equipment investment was primarily in 300mm (12 inch) technology and in 45nm (nanometer) tools. Even with a meager 1 percent gain in 2007, the semiconductor equipment market will be the second largest year ever for sales, so I do not hear many complaints.

Expansion to continue?

Most (chip) market watchers such as iSuppli are predicting the second half 2007 expansion to continue into 2008 with 9.3 percent revenue expansion, which will take us very close to the $300 billion revenue mark in 2008. This positive forecast is in line with forecasts from Japanese semiconductor giants Toshiba and NEC Electronics, who both are forecasting 2008 global chip revenue increases of 10 percent or more. Most say evolving and new applications in cell phones and consumer electronics (digital TVs, music, gaming and other handheld computing) will continue to fuel chip demand. They cite this development, as well as an expected sales surge in flat panel televisions as the 2008 Beijing Olympics approach, as reasons for optimism.

Additionally, global PC sales grew at their fastest pace in two years during the fourth quarter of 2007 as strong demand for laptops was evident in every region of the world. Most PC manufacturers are expecting to announce new laptops in 2008 that use a combination of hard disks and flash memory for storage, which should help to absorb NAND flash manufacturing capacity. As such, most market watchers are forecasting the electronics equipment market (consumer electronics, wireless, automotive, etc.) to grow another 6 percent to 7 percent in 2008.

Credit, oil could spell trouble

At the risk of being labeled a curmudgeon, I think it would be irresponsible not to add some caution to these double-digit predictions of 2008 chip growth. Approximately 40 percent of all chip sales go into PCs. The consumer electronics market, which includes PCs, digital cameras and music players as well as flat panel TVs, is the fastest growing electronic equipment segment - so the demand for chips is high. While high oil and gasoline prices and the subprime mortgage market mess have been with us for awhile, a recent Fortune magazine report calls attention to the "$915 billion bomb in consumers' wallets" in the form of credit card debt - which has been steadily rising as consumers tap credit cards, rather than home-equity lines of credit, to pay for luxuries such as electronics and increasingly use credit cards to make mortgage payments.

Rising credit card delinquencies could cause large ripples throughout the U.S. economy, adding to the stresses already in place from high gas prices and subprime lending practices. Consumer spending is critical to economic growth since it accounts for 66 percent of the country's economy. So this bears watching and can have a large impact on consumer electronics spending.