For five of the last six years, the worldwide economy has faced lackluster GDP growth and anemic pricing power, and the IC industry has mirrored those trends. IC Insights believes that because of increasing global trade, especially the increased role of China in manufacturing and India in software and services, electronics companies will continue to face pricing pressures for many years to come. That pressure will trickle down, affecting both IC suppliers and capital equipment manufacturers. Given the abundance of foundry capacity expected to be in place over the next few years, significant increases in IC average selling price (ASP) will be difficult to sustain, even during upturns.
An optimistic scenario for 2003 would result in a 20 percent increase in the IC market.This scenario has the first and second quarters rising 8 percent, with double-digit sequential growth in the third and fourth quarters. But early indications of 2Q growth in ICs (from companies such as Intel, STMicroelectronics and TI) do not support the 8 percent forecast, and at present, IC Insights sees only a 10 percent chance of the optimistic scenario's occurring.
In our opinion, the pessimistic scenario has a 35 percent chance of coming to pass. In this scenario, sequential IC market growth for the remainder of the year remains subdued, with low sequential growth rates in the second and third quarters compared with the same period a year ago and the same sluggish, 3 percent rise in the fourth quarter as in last year's final quarter. If the final three quarters of 2003 exhibit the same sequential market increases as the last three quarters of 2002 (4, 8 and 3 percent), total 2003/2002 IC market growth would be 10 percent.
In IC Insights' 2003 quarterly forecast, to which we attach a 55 percent probability, the 2Q, 3Q and 4Q sequential growth rates are 5, 10 and 9 percent, respectively. For the second and third quarters, this is only slightly better than a year ago. However, for the 15 percent increase that we anticipate in the 2003 IC market, the fourth quarter will need to do far better, at 9 percent, than last year.
Overall, 2003/2002 growth rates for the IC industry and semiconductor capital spending are expected to be very similar. It will take a strong second-half capex rise to reach IC Insights' 15 percent growth forecast for the entire year, but that may well be possible. Our forecast expects a "follow-through" 17 percent increase in semiconductor capital spending in the fourth quarter. The final quarter of last year, by contrast, saw a steep, 15 percent contraction.
Since the IC market declined slightly more than IC Insights expected (4 percent actual, 2 percent expected) in both the first quarter and in last year's fourth quarter, our 2003 IC market forecast can be considered "slightly optimistic." Even so, the growth expected for unit volume shipments (as opposed to dollar volumes) is slightly pessimistic. If IC market growth is less than 15 percent in 2003 it is much more likely, in our opinion, to be due to continuing IC ASP pressures than to a shortfall in unit volumes.
Our forecast assumes that a PC upgrade cycle will begin in that fourth quarter, that SARS will be well contained in the third quarter, that worldwide GDP will grow 2.7 percent (slightly above the 2.5 percent level considered a global recession) and that 4Q IC capacity utilization will reach 90 percent or greater. Moreover, with IC unit volumes forecast to increase at least 11 percent, IC suppliers are expected to begin to increase their capital spending for "capacity buys" significantly in the final three months of 2003.
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Bill McClean is president of market research firm IC Insights (Scottsdale, Ariz.).