With IC unit inventory levels coming into balance in the first half of 2002, IC industry growth in the second half will be especially dependent on an increase in electronic-system sales. In the first half, there was a temporary "disconnect" between a rebounding IC industry and relatively flat electronic-system sales.
In the electronic-systems arena in the first half, Nokia reduced its industry-wide full-year expectations for cellular-phone sales to about 410 million to 420 million units, Nortel stated that it did not expect a rebound in the worldwide networking-equipment market until late 2003 or early 2004, and most PC companies encountered declining unit-volume sales. In contrast, in the IC business, National Semiconductor's sales increased 14 percent sequentially in its quarter ending in May, and all of the major IC foundries were set to log strong double-digit first- and second-quarter growth. Moreover, Texas Instruments, STMicroelectronics and a number of other IC producers expected to register 2Q/1Q sales increases of 10 percent or more.
IC Insights has always believed that, on a short-term and temporary basis, the IC market has the ability to display significant sequential quarterly growth without a substantial increase in electronic-system sales. We use the term "structural rebound" to describe such a situation; it can also be described as inventory replenishment. It should be noted that IC inventory replenishment could occur even when a company's system sales have not significantly rebounded.
The IC industry certainly welcomed the increased demand for its products and the accompanying increase in wafer starts witnessed in the first half. However, early-2002 figures revealed an environment characterized by "profitless prosperity." In the first half, the IC industry recorded its lowest revenue-per-wafer level since 1992. Thus, although IC unit demand and wafer starts surged during the period, IC producers still lacked the ability to get any pricing traction to raise average selling prices (ASPs).
Prosperity without profits
May saw a sharp decline (-3 percent), to $1.49, in the three-month average IC ASP-the lowest since the downturn began in 2001. (The nonaveraged IC ASP was only $1.41 in May.) At the same time, three-month average IC unit-volume shipments increased 5 percent. Assuming the final second-quarter ASP figure also ends up at $1.49, it would mark the lowest quarterly result since the $1.42 registered 10 years earlier, in the second quarter of 1992.
In 1997, the IC industry also endured a bout of profitless prosperity. In the year after the severe IC market downturn of 1996, worldwide IC unit-volume shipments surged 22 percent, but IC ASPs dropped by 15 percent. Overall, the IC market managed only a 4 percent increase in 1997 (about the same increase IC Insights expects for 2002).
The comparison between 2002 and 1997 is compelling. This year occupies the same position in the IC industry cycle as 1997 (that is, the first year after a significant downturn). Moreover, data through May indicated a strong surge in IC unit demand (and wafer starts) accompanied by severe IC ASP weakness, mirroring the situation in 1997.
Looking at the quarterly numbers, the worldwide IC market increased 5 percent between the fourth quarter of 2001 and the first quarter of 2002, but registered a 1 percent decline if DRAM sales were excluded. Examining the IC market by product segment for the first two quarters of this year illustrates the uneven nature of the 2002 recovery. The 1Q02/4Q01 analog market was flat, total MOS micro increased only 2 percent, MOS logic was down 5 percent and the MOS memory segment shot up 35 percent (with the DRAM market increasing 82 percent). In contrast, the analog market surged 16 percent in the second quarter over the first, while total MOS micro decreased 3 percent, MOS logic jumped 13 percent and MOS memory declined 1 percent (with the DRAM market dropping 14 percent).
IC Insights estimates that the total 2Q/1Q IC market increased 5 percent, or 8 percent excluding DRAM. It is interesting to note that all of the IC product segments that registered negative 1Q02/4Q01 results (for example, application-specific analog, DSPs, gate arrays, standard cells, special-purpose logic, SRAMs, ROMs, EPROMs and flash memory) are estimated to have displayed positive growth in the second quarter.
The best-case 2002 scenario assumes that third- and fourth-quarter results will each match the highest sequential quarterly IC industry growth rates on record: 18 percent. These 18 percent sequential quarterly increases occurred only twice in the last 25 years-in the second quarters of 1984 and 1986. IC Insights would never say that such a second-half scenario could not unfold this year. However, we do not believe it is the most likely path the IC industry will follow.
Worst-case outlook
The worst-case scenario would be for a 4 percent decline in 2002. In this outlook, the decline in the DRAM market ends up worse than expected in 2Q, and a second-half recovery in the electronic-systems market fails to materialize. As with the best-case road map, IC Insights does not believe this outlook is the most likely scenario for the IC industry.
After the first-half IC inventory replenishment phase, IC Insights' 2002 forecast assumes that U.S. and world economies continue to recover to spur a second-half rebound in electronic-system sales. This in turn will lead to double-digit sequential growth in the IC market in the fourth quarter and a 5 percent increase for the year. However, IC ASPs are not expected to significantly rise until the fourth quarter, coinciding with spot shortages of leading-edge capacity.
Bill McClean is President of IC Insights Inc. (Scottsdale, Ariz.).
IC Insights' Worldwide 2002 IC Market Forecast
