European chip market to post modest growth through 2020

screen-shot-2016-12-01-at-16-36-59The European semiconductor market will end 2016 growing just 1.5 per cent to $36.18 billion, but will be the only geographic region that will experience growth, according to Semico Research.

By comparison, the U.S. semiconductor market will end 2016 declining 5.8 per cent. Japan’s chip market will fall 7.7 per cent, while semiconductor sales in China will drop 0.7 per cent, and chip revenue for the rest of Asia will decline 1.7 per cent, the researcher said.

For the next five years, European semiconductor revenue will not be stellar, but will be steady as chip sales grow 2.6 per cent per year through 2020, Semico said. “Europe’s semiconductor growth in 2016 has a lot to do with the industrial and automotive markets,” said Jim Feldhan, Semico president. The industrial and automotive segments are especially strong in Germany.

“Europe does better in the industrial segment because it is more focused on automation. That helps the semiconductor industry,” said Feldhan.  Another semiconductor driver in Europe is communications infrastructure, especially wireless base stations, he said.

Feldhan said industrial Internet of Things (IoT) will have an impact on the European chip market in the future.  “It is starting to gain some momentum,” he said. “There’s a tremendous opportunity because there are many industrial machines and many of them are not yet connected together,” said Feldhan.

Connecting factory equipment together so that “factories are fully integrated will take a few years to build up momentum,” said Feldhan. The impact of industrial IoT for the semiconductor market may be felt in 2018 with increased sales from the segment.

Automotive will boost IC revenue
Besides industrial equipment, automotive—including Advanced Driver Assistance Systems (ADAS) —will be a driver for European semiconductor sales, according to Myson Robles-Bruce, principal analyst with IHS Technology. ADAS improves vehicle systems for safer driving. For example, a vehicle equipped with ADAS can avoid collisions because the system will warn the driver of possible problems such as a stalled vehicle in the middle of the road or an oncoming tractor-trailer that has crossed the center line of the highway. In some cases the advanced driving system will take control of the vehicle if a crash is about to occur. ADAS features include blind spot detection, surround view cameras, lane change warning, automated braking and lighting and lane change warning.

“There will be 20 per cent growth on the equipment side,” of ADAS, which will boost semiconductor sales for years, said Robles-Bruce.

In fact sales of integrated circuits for automotive systems will grow 9.4 per cent annually through 2020, according to researcher IC insights. Brian Matas, vice president of market research for IC Insights, said the European automotive IC market is rising because of growing electronics content in vehicles fueled by ADAS, the development of the autonomous vehicle or driverless car, and an increase in number of electric vehicles (EV) and hybrids in Europe.

Many of the new automotive systems involve safety features such as backup cameras and emergency braking systems, which governments in Europe and North America are mandating. Matas noted European automakers such as Mercedes, Volvo, BMW and others often equip their higher-end luxury cars with leading-edge electronics systems. “Automotive IC suppliers in Europe will definitely benefit because a lot of the systems are not just for luxury cars, but are trickling down to midrange and smaller cars” as many of the systems become mandatory, said Matas.

Stronger sales for MCUs, sensors
He said high-tech advanced automotive systems will drive sales of a variety of ICs including microcontrollers, analog ICs, sensors and optical electronic components. Flash memory, light emitting diodes and power management chips are also needed for many systems.

The growth in popularity of EVs and hybrids will also drive European semiconductor demand over the next several years because EVs and hybrids have higher semiconductor content than vehicles that run on gasoline.

A gas powered car has about $330 of chips but EVs and hybrids have more than $700 of semiconductors, including metal oxide field effect transistors (MOSFETs), and integrated gate bipolar transistors insulated gate bipolar transistors (IBGTs).

There will be other drivers for the European semiconductor market, although automotive will be the largest single segment, said Robles-Bruce. Military and aerospace equipment shipments will grow about 10 per cent in 2017 and there will be a significant growth in building and home control, most of that is lighting. There is also strong growth for surveillance equipment in Europe, he said.

For 2017, integrated circuit sales for automotive applications will grow to $8 billion from $7.4 billion in 2016, he said. However, computer IC sales will decline to $7.1 billion in 2017 from $7.4 billion in 2016. Shipments of ICs for industrial equipment will increase slightly from $3.8 billion to $3.9 billion in 2017. While the European IC market will rise through 2020, its share of the global IC market will decline.

Three years ago Europe represented about 10 per cent of the global IC market share, but dropped to about 9 per cent in 2016, according to Matas. By 2020, Europe will represent about 8 per cent of the total global semiconductor market, he said.

“It is gradually eroding because of the gains made in the Asian-Pacific region,” he said. “We see America’s share dropping, too. The bigger gains being are being made in made in Asia-Pacific.”’

Expect stable prices
While demand for semiconductors in Europe and the rest of the world will increase in 2017, buyers can expect relatively flat prices overall for most semiconductors, although tags for some chips, such as memory ICs, may increase. The average IC price will increase slightly from $1.00 to $1.01, according to Semico.

Analysts say prices will remain mostly stable and lead times short at least through the first half of 2017 because of ample capacity and supply. However, supply could tighten later in the first half because of sluggish capital spending by semiconductor companies in recent years. Capital expenditures (capex) by chipmakers will end 2016 rising only about 3 per cent to $67.1 billion from $64.8 in 2015 when capex declined 2 per cent from the previous year, according to IC Insights.

The lack of investment in new fabs and new equipment by integrated device manufacturers (IDMs) and foundries could result in tighter supply if demand surges in the second half of 2017. The good news is that capital expenditures by semiconductor companies will rise in 2017. Trade association SEMI said that fab equipment spending worldwide in 2017 will rise 10.6 per cent. Much of that increase in investment will be made by foundries and memory IC manufacturers, according to the trade association.

In Europe and the Mideast capital spending will increase 59.9 per cent from $1.5 billion in 2016 to $2.4 billion in 2017, SEMI said.

Besides investment in equipment and facilities, another trend buyers should watch is further consolidation of the semiconductor supply base. Some analysts say consolidation will eventually impact prices as large OEMs and electronics manufacturing services providers (EMS) will have less leverage because there will be fewer suppliers competing for business.

More consolidation is likely in 2017, although it won’t occur on the same scale as it has over the past two years because there are fewer semiconductor manufacturers and fewer acquisition targets.