Set against the backdrop of a weak US dollar, market research company Gartner Inc presented its worldwide forecast scenario for 2009.
Setting the stage, Richard Gordon, Research VP, global forecasting at Gartner, said IT spending is expected to decline by 3.8 percent in 2009, almost twice the 2.1 percent decline of 2001, which was the last major downturn in the electronics industry.
“The reasons for the decline are obviously very different,” he reminded. “Back in 2001, the technology bubble burst so you can look at that as a supply-side-type event. The huge over-investment in tech leading up to the year 2000 caused the problems in 2001. This time around, we’ve got a very different scenario. We’ve got a global economic recession, which is leading to a slowdown in demand right across the board, both in enterprises and consumers.”
This slowdown is broad-based, resulting in all four of the key market sectors of hardware, software, IT services and telecommunications being revised downward significantly, with only software spending growth remaining marginally positive in 2009, he noted.
During Q1, the worldwide economy continued to deteriorate with news of major bank nationalizations, drastic interest rate cuts and emergency rescue plans being adopted by many governments and institutions across all regions, which shaped the company’s assumptions for the future growth of the IT market, Gordon continued.
“On the positive side from a technology point of view, there is a trend toward things like software-as-a-service, and virtualization, which is an interesting technology trend," he pointed out.
“While the long-term outlook in the current environment is far from certain, this uncertainty is more to do with the timing of the economic recovery than any doubts that a recovery will occur. So, looking at the overall forecast profile, our fundamental assumptions is that that the economic downturn in 2009 will continue to impact IT sending in 2010 but by 2011 mid single digit annual growth will return,” Gordon added.
End market demand for semiconductors not returning yetIn terms of semiconductors, Peter Middleton, principal analyst, semiconductor applications at Gartner, said guidance from semiconductor vendors indicated positive growth in Q2, therefore, Gartner forecasts Q2 sequential industry revenues up 4.9 percent.
However, he pointed out that there is minimal evidence that end market demand is returning for the two largest markets for semiconductors: PCs and cell phones. Still the company slightly raised its 2009 PC unit production outlook up from -14.6 percent to -10.7 percent, but left its 2009 cell phone unit forecast unchanged at -12.1 percent.
While industry revenues in Q1 were slightly better than expected, with -17 percent quarter-over-quarter expected, revenue were actually down -15.7 percent or slightly better. Gartner had forecast -1 percent for Q2, but believes it will actually be up 4.9 percent quarter-over-quarter, based on vendor guidance.
“Big companies such as Intel, TSMC, and others reported seeing strong bookings but these tended to be in selected markets,” Middleton explained. "China has been in the news; especially telecom with the 3G cellular build out and the PC sector has strengthened. However, we’ve seen minimal evidence that electronic equipment demand is clearly returning. There is lots of evidence that China is running strong but in other regions of the world we’ve seen very little evidence. So our conclusion is that the majority of the projected growth in the near-term is inventory replenishment.
In the second half, Gartner said it expects consumer spending to remain fairly depressed due to high unemployment, falling housing prices, and still low consumer confidence.
For 2009 overall, Gartner is now forecasts that worldwide semiconductor revenue will reach $198 billion, a 22.4 percent decline from 2008 revenue of $255 billion, which was slightly better than Q1 projections, when the company forecast semiconductor revenue to decline 24.1 percent in 2009.
Gartner expects annual growth to return to the semiconductor industry in 2010, with growth of 10.6 percent, followed by additional growth through to 2012, however, does not expect the industry to exceed 2008 revenue totals until 2012 with worldwide semiconductor revenue of $260 billion to remain flat in 2013.
Given that the outlook for the semiconductor industry in 2009 remains gloomy, tight control of expenses is essential, Middleton asserted. “The fact that semiconductor revenues will grow sequentially in Q2 is a welcome development. However, our position is that this is occurring as a result of inventory replenishment now that the rate of decline in electronic equipment sales is moderating. One positive sign for the industry is the impact of the stimulus and telecom spending.
“Despite the severity of the downturn, vendors should think twice before lowering R&D budgets because well-chosen R&D investments during the recession will help determine which businesses get a head start in the upturn. Vendors should also consider outsourcing and partnerships, to help them make the most of their R&D budgets,” he added.
Get back to basics for long-term financial viabilityOffering more advice for bad times, Bob Johnson, Research VP, semiconductor research, broke down some of the key metrics that Gartner believes determine the financial viability of companies, industries, and segments as a basis to evaluate good financial strategies for future viability.
“As we sit at the bottom of the worst recession in the history of the industry, the current situation is varied. Everyone is hurting, but some are weathering the storm better than others,” he observed. “The memory industry is awash in a flood of red ink, brought about by rampant overcapacity which only exacerbated the effects of the recession. This has led to bankruptcy in some cases, and anticipated bail-outs in others.”
The big question is how to evaluate industry viability, and what are winning strategies for the future.
Based on a financial rating system that Gartner is developing, Johnson observed that when comparing a baseline period of average performance for 2003 to 2006 with the performance for calendar year 2008, both the memory and the analog/mixed signal segments dropped into the “caution” zone in 2008, while other segments fared better. Of these two, memory showed the worse performance, with metrics that put it at the low end of the caution zone compared to the analog/mixed signal segment, which was at the high end.
Looking at top companies in the semiconductor, foundry, and equipment segments, Johnson pointed out that it is apparent that the recession has hit even some of the biggest companies very hard with Qualcomm being the only company earning a “strong positive” ranking. Industry leaders Intel and Samsung, along with Texas Instruments, Broadcom and Marvell, are the only companies earning a “positive” ranking, with the remainder dropping to either “promising” or “caution,” with Hynix falling into the “strong negative” category, he said.
With the exception of Samsung, companies with strong memory presence—Toshiba, Hynix, and Elpida—fared poorly. In addition, both Freescale and NXP, which represent the private equity takeovers, showed the problem which being burdened with debt from a leveraged buyout can bring, Johnson said.
The top three foundries—TSMC, UMC, and Chartered—fared reasonably well, as did the major equipment companies.
Based on a review of the key financial metrics, and how they change during a downturn, Johnson suggested that companies apply a few basic guidelines. First, avoid debt. While this seems to be fundamental, many companies (and financial consultants) believe that a certain amount of debt is OK. However, significant debt can turn into a major liability when debt payments are due in a downturn and there is not enough cash available to make the payments, he said, pointing to Elpida, Hynix, and ProMos as some examples of this problem.
Second, keep sufficient gross margins to cover R&D and SG&A (Selling, General and Administrative), and sound profits to ensure there is sufficient cash to carry through lean times.
Third, build cash by maintaining margins and profits and not over investing to prepare for lean times, because there is nothing better in a downturn than a large cash balance in the bank. Companies with fabs have two choices: maintain profitability and cash generation at high enough levels to fund capex, or evaluate a fabless strategy with lower capex requirements. Borrowing to fund capex leads to high debt levels and increases financial risks during the downturn.
Fourth, avoid leveraged buyouts. Directed at the few companies considering going private with private equity and leveraged buyouts, Johnson pointed out that that this type of transaction can put needless debt on the balance sheet and lead to future problems, reminding that both NXP and Freescale had debt repayment problems this year.
In terms of commodity IC makers such as memory, manufacturing cost structure is the key to financial success, he said. Accordingly, companies wishing to compete in this arena need to have a competitive cost structure, which is largely determined by the leader’s level of manufacturing technology.
Further, commodity companies need to master the market demand economics and manage the total market supply for profits because massive overinvestment and the corresponding oversupply leads to disastrous pricing environments, red ink, and excessive fixed costs (depreciation) which cannot be recovered by plunging profits.
For chipmakers in markets where products are differentiated by features and performance, a different set of guidelines has emerged such that only the biggest companies can afford to be fully integrated IDMs and remain profitable.
“The investments required to build leading-edge fabs are prohibitive for the majority of companies. The alternative is the fabless/foundry outsourcing model. It is no accident that companies using this model are some of the strongest financially,” he said.
Finally, R&D spending must be maintained to maintain product leadership and protect ASPs and margins, Johnson concluded.
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