Semiconductor market will recover in 2017

Improving economic growth, healthy chip demand and stabilizing prices will result in 5 per cent growth for the semiconductor market in 2017, By James Carbone.


The good news for electronics purchasers is that it will not be a seller’s market for semiconductors in 2017 as supply will be ample and lead times for most chips won’t stretch.

The bad news is it won’t be a buyer’s market either as chip prices, which had fallen in recent years, will firm and tags for some semiconductors will increase.

“It will be a recovery year in 2017,” said Jim Feldhan, president of Semico Research. Semiconductor sales will increase 5.3 per cent to $354.2 billion, he said. That is a significant improvement from 2016 when sales were expected to end the year declining 2.5 per cent to $336 billion from $345 billion in 2015 because of sluggish demand from computer, smart phone and communications equipment manufacturers.

However, end equipment demand is expect to pick up in 2017, resulting in stronger semiconductor demand. In fact, it appears the recovery of the semiconductor industry actually began in the second half of 2016, according to Feldhan.

“The third quarter of 2016 was up 11 per cent from the second quarter and September was actually up 22 per cent over August and that was a record-breaking month,” he said. “The quarter ended up $83 billion. We were forecasting $88 billion for the fourth quarter,” Feldhan said.

While semiconductor business improved in the second half, it was not enough to overcome declining revenue caused by falling prices, especially for memory ICs.  “The biggest problem in the first half of the year was memory prices were declining,” said Feldhan. “There were really steep declines for DRAM.” However, in July prices started to increase for both DRAM and NAND flash.

Another reason revenue fell in 2016 was falling prices for ICs used in wireless equipment. Shipments of smart phones did not grow as much as in previous years. Smart phone sales often increase 10-20 per cent per year, but in 2016 shipments increased only 6 per cent, said Feldhan.

Mobile communications infrastructure is another area that has struggled as more software is used to upgrade systems rather than semiconductors, according to Myson Robles-Bruce, principal analyst with IHS Markit Technology. He said 5G networks “will be more based on software and there’s not a whole lot of hardware development around 5G.”

Demand to rise
However, the good news for chipmakers supplying semiconductors for computers, smart phones and other equipment is demand should increase next year. Businesses are replacing their older computers. “Although it’s not dramatic, it will stop the big single-digit declines” of computer shipments, said Feldhan.  More consumers will also replace their older computers, he said.
“The overall PC market will be stable,” said Feldhan. While sales of desktop computers will decline, notebooks and tablets will have positive growth. “The net result is basically a flat market and that’s a marked improvement from being down 6 per cent in 2016 and 9 per cent the year before,” said Feldhan.

Other end markets will also help drive semiconductor demand in 2017. “We’re seeing good growth in the medical market. The Internet of Things (IoT) still needs to prove itself in terms of volume, but there’s a lot of design activity,” he said.

IoT is often talked about as having the potential to be a major demand driver for all electronic components including semiconductors. However, many suppliers and analysts say it so far has had limited impact on the semiconductor market. However, that is not the case with the automotive segment.  Automotive represents about 12 per cent of the overall semiconductor market and it is growing at near a double-digit rate, said Feldhan.

One reason for that growth is continuing development of Advanced Driver Assistance Systems (ADAS), which require DRAM, NAND flash memory, general-purpose microprocessors, application specific standard products and analog chips among other semiconductors, said Robles-Bruce.

Strong auto IC growth in U.S.
Matas said the auto industry is having a huge impact on chip sales in North America. The compound annual growth rate for the automotive IC market is 10.4 per cent, compared to 9.4 per cent in Europe, he said.  “There is a surge going on in the United States with implementation of more automotive electronics,” said Matas.

Some of the electronics systems are government mandated such as backup cameras in vehicles which will be required in 2018. Other features are not yet mandated, but automakers are designing them in anyway. One example is emergency braking systems.

“Automobile manufacturers are working together to make sure each car has emergency braking systems,” said Matas. “It is not a government-issued mandate, but they are working ahead of the government.”

The autonomous vehicle or self driving car is a major focus in North America and will drive chip sales for years. “Google and Uber are test driving their autonomous vehicles and other cars are also being tested,” said Matas. Once such cars go into volume production, it will have an impact on semiconductor sales especially for sensors, microcontrollers and analog chips among others

Other segments that will drive semiconductor demand in 2017 other than automotive include defense, civil aerospace and consumer electronics, according to Robles-Bruce. “In consumer electronics, equipment such as HD televisions, home appliances and possibly smart watches will drive demand next year,” he said.  As a result, semiconductor revenue should grow 5 per cent in 2017 and stronger growth is likely in 2018, said Robles-Bruce.

Feldhan added that the overall economy should improve in
2017 and that will help drive demand for electronics equipment and components. In fact, GDP in the United States in the third quarter increased to 3.2 percent and some economists said decent economic growth should continue into 2017.

“We’re expecting a little bit better economic growth next year and that will help the industrial market as well,” said Feldhan. The combination of slightly improved economics, better supply and demand, better handset sales and stable computing market, tends to lead to stable average selling prices for semiconductors, said Feldhan. He said the average selling price for an integrated circuit was $1.01 in 2016 and that will decline slightly to about $1.00 in 2017.

However, prices for some chips are expected to increase. For instance, IC Insights is forecasting a 5 per cent increase in DRAM prices in 2017. In 2016 there was a 16 per cent decline in the average DRAM price and a 4 per cent drop in 2015, the researcher said.

For other chips. prices may fall, but at a slower rate than in recent years. For example, in 2014 there was an 11 per cent decline in ASPs for NAND flash, said Matas. In 2015 and 2016 prices decline 6 per cent in each year. In 2017, the average price for NAND will drop only 2 per cent.

Enough capacity?
While analysts are forecasting an increase in semiconductor demand for 2017 and beyond, there should be enough capacity in place so there are no serious shortages or huge price increases as foundries are making the needed investments in capacity.  “Most of the industry is using foundries now so they are aggregating all of that demand and they will be able to build the capacity that the industry needs,” said Feldhan.

“We’ve seen significantly less boom/bust cycles with capacity because of shared capacity as a result of the foundry market.” He noted that TSMC—the largest foundry—is making the necessary investments and is pushing ahead on developing 10 and 5nm processes.

“TSMC has a lion’s share of the market and will be able to invest enough dollars to supply the industry with capacity,” said Feldhan. Globalfoundries, another major foundry, has also increased capacity.

Intel, which builds its own chips, has excess capacity and has “a lot of floor space that they could put equipment in” if the company needs to, said Feldhan.

Analysts noted that the semiconductor industry has matured and growth in the future won’t be spectacular so there should be fewer capacity issues than in the past.  However, while the industry has matured there will still be growth, but it will steady because of continuing demand for servers, televisions and other consumer electronics, smart phones, computers and cloud computing.

Because of slower, but steadier semiconductor demand, Semico forecasts 3.3 per cent compound annual growth for the industry through 2020. Such a growth rate is likely to continue for years “until we have another Steve Jobs who comes along and invents the next must-have type product,” said Feldhan.