Pure-Play semiconductor foundry market set for growth in 2012

The rapid growth this year is a major improvement from the 3 percent expansion in 2011, when industry growth slowed after a 45 percent surge in 2010 following the recession. Unlike last year’s sudden slowdown, however, foundry revenue will remain strong in the years ahead. Revenue will rise another 14 percent next year to an estimated $33.6 billion, with solid double-digit growth continuing in 2014 and 2015.

 “This year’s notable performance is a result of the widespread growth of consumer-related products requiring advanced technology for low-power applications,” said Len Jelinek, director and chief analyst of semiconductor manufacturing at IHS. “For such applications, the overall number of semiconductors must grow in order to support the more sophisticated functionalities.”

Among the products that will increase their semiconductor content this year are hot portable devices like tablets, such as the industry-leading iPad; smartphones, including those from Apple as well as Google Android handsets; and ultrabooks, a key new device that many companies hope will drive fresh growth.

In particular, the increased sales expected this year in tablets and smartphones will spur revenue expansion for the NAND flash memory and logic application-specific integrated circuit (ASIC) semiconductor markets.

Meanwhile, a revitalized notebook market, due to the Ultrabook’s emergence, will power revenue growth in the microprocessor semiconductor space.

These winning segments will represent a stark contrast to one dwindling semiconductor market in the foundry segment. This year, the slowing sales of dynamic random access memory (DRAM) is forecast to underperform, especially in light of the recent bankruptcy filed by key DRAM player Elpida Memory of Japan.

Even with the sense of widespread optimism now sweeping through the semiconductor industry, challenges remain.

The most critical issue in 2012 will continue to be the global economy, IHS believes. Although conditions in the United States and some Eurozone countries are beginning to improve, growth could still stall for these and other economies dependent on oil, especially in the wake of already high energy prices that could spiral further out of control if tensions remain unresolved in the Middle East.

Inventory also remains a key concern throughout the supply chain at this time. Companies, for instance, are still waiting to place orders at the last possible minute, knowing that overall manufacturing capacity remains in excess of demand. How much additional inventory reduction will be necessary remains to be seen, dependent more on possible new innovations that could fuel semiconductor growth than on a simple adjustment being made to supply and demand for existing products.

A third challenge for foundries relates to finances. Firms are projected to be even more cautious on actual capital spending in 2012, although expenditures already are forecast to plunge 19 percent this year.

Foundries also will have to contend with a continuing decline in average selling prices (ASP) in light of increased overall competition.

The pure-play foundry landscape continues to be fragmented into a principal echelon comprising the Top 4 suppliers, with the remaining 16 companies forming a less influential second tier.

The Top 4 pure-play foundries last year included No. 1 Taiwan Semiconductor Manufacturing Corp. (TSMC) with revenue of $14.0 billion, followed by UMC at a distant second with $3.6 billion. The remaining Tier 1 suppliers were No. 3 GLOBALFOUNDRIES with $3.5 billion, and fourth-placed Semiconductor Manufacturing International Corp. (SMIC) with $1.3 billion.

At No. 5 last year and ranked at the top of the second tier was TowerJazz Semiconductor with $613.0 million. TowerJazz also enjoys another distinction: the model used by the company to increase capacity, through fab acquisition with a multiyear foundry manufacturing agreement, remains the most viable expansion method for companies looking to grow capacity, IHS believes.

Such a solution, which involves acquiring a fab and then building off of the expertise of an existing manufacturing facility, is the most effective way to serve demand when it is aggregated in the semiconductor market, especially as many second-tier foundries in China and Europe are finding it difficult to achieve differentiation.

TSMC remains in the unique position of having more capacity than all of its competitors combined, as well as possessing the financial strength to outspend every one of its rivals.

IHS iSuppli

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