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Clouds Loom On The 2012 Semiconductor Horizon

Dec. 27, 2011
Objective Analysis forecasts a 10% decline for semiconductors in 2012, a mild recovery around the middle of 2013, and finally strong growth (over 20%) to follow in 2014.

The outlook for semiconductors and electronic end-equipment for 2012 is cloudy. With grim economic predictions dominating global commerce, consumers, businesses, and governments have been unable to move forward with much confidence the last couple of years.

The pall shows no sign of lifting in the coming months. Overall, 2012 will be characterized by a contraction in semiconductors compared to a weak 2011. It is unlikely to be the year in which the industry breaks the elusive $300 billion milestone.

With a combination of effects including fewer jobs and longer work hours, tighter budgets and less discretionary spending, more cautious and quicker-return projects, and more polarized arguments over the wisdom and role of governments to set the tone for business (international or domestic), international financial woes have stagnated many industries.

The Earth may be warming, but the global economic climate shows only a few sunny spots with no imminent spring to bring business back to life. In the United States, the 2012 presidential election is not expected to raise consumers’ spirits or businesses’ outlooks. Although the electronics industry is faring little better than business in general, a few topics will carry us onward through the fog.

Drought Of Cash

With financial crises at every turn, the effects on high-tech are extreme. A high-stakes electronics and semiconductor industry requires huge infusions of cash to bring sophisticated ideas to reality in silicon, fiberglass, and software. The shortage of credit has severely hampered funding for startups, research and development budgets have been curtailed, and promising projects sit forgotten in the drawer.

Many semiconductor and high-tech companies have been brought to their knees under the scrutiny of Wall Street or to the bargain basement for sale. With less R&D and fewer startups, the whole industry loses diversity and the opportunity for exciting new products to come to market is diminished.

Green Reigns

But the sun is shining on “green” products. The push for green electronics has created an area of growth—and a demand for semiconductors. From systems to microprocessors to packaging, smaller size, higher efficiency, and lower power consumption are driving forces in all electronics today.

The Smart Grid is a slow-moving concept that could one day require a lot of electronics for monitoring and control, but will not contribute greatly to chip growth in the near term. At the other end of the spectrum, portable battery-powered products with ever-increasing capabilities are showy favorites. Consider smart phones, which garner far more interest than PCs these days.

But batteries continue to lag behind semiconductor and even software advances, whether they’re powering cars or cell phones. Therefore, Moore’s law has been applied to improved power consumption, even if Moore’s company has been slow to embrace low power the way most semiconductor vendors have. Engineers love a challenge, and efficiency is a good never-finished goal. All devices with reduced power consumption or greater portability have a sunny future.

Clouds Compute

Not all clouds are bad news, anyway. Cloud computing is growing, but it is difficult to know whether this will ultimately increase the number or value of semiconductors shipped.

The cloud represents another kind of efficiency: rather than having all PCs idling with the capability to run performance-demanding software applications, a few powerful servers in the cloud provide access to all who want them, only when they need them. Cloud services also feed opportunities for the less powerful smart phone. Server farms and storage barns will need to be enhanced to meet a growing demand.

The network infrastructure—including cellular—must also continue to grow. It is the only way to deal with ever increasing data, image, video, and voice traffic generated by bandwidth-heavy business and consumer demands. It is hard to imagine network traffic growth ever slowing down, except locally, late at night. Network security must also be enhanced.

Consumer electronics are alive, but growth is focused on application software and services rather than new forms of hardware. Game consoles haven’t had a generational turn in quite a while, 3D TV and movies are more thud than thunder, and consumers are turning to their phones to handle everything.

At this writing, year-end spending hasn’t been tallied yet, but the burst of Black Friday and Cyber Monday shopping (a U.S.-driven phenomenon) is more about bargain hunting and Internet stores than expanding markets. It’s hard to identify a consumer must-have gift this year unless it’s optimism. So what is there to get excited about?

Waving The ARM

The ARM processor architecture is popular for its availability and power thrift, so chips and end-equipment based on ARM cores have made great gains in embedded applications over the last decade. This growth should accelerate. The broad support of the ARM architecture continues to attract products in new categories and redesigns of existing products, including Intel territory.

Proprietary processor architectures are fading as their unique characteristics pale in comparison to piles of off-the-shelf software and widely available expertise and tools. ARM cores now range from sub-dollar microcontrollers (MCUs) to multicore applications processors. Low-power server platforms with 64-bit addressing are due out in 2012. ARM is also the predominant processor for running the Android operating system (OS).

Polishing The Apple

With its straightforward, intuitive, fun user interfaces and elegant product styling, Apple has come to dominate some well-established (if fractured) markets by putting the “I” first (I, the user) in the name as well as the consumer product.

Service is a key ingredient in Apple’s success. Apple has made it easy to get content without infuriating the creators or distributors. In fact, the business model soon gave all sorts of small businesses a ready audience for their software-based services.

Competitors are jealous of the prices Apple commands for its products, while the variety of products Apple offers further entrench their customers. What other company’s customers are deemed “the Faithful” by the press?

The loss of the cofounder and leader of Apple, Steve Jobs, may be the most significant personnel change ever in the electronics industry. In fact, even political leaders rarely have the impact on both business and lifestyle that Jobs has had. His vision, spirit, drive, perception, and marketing prowess are legendary and deservedly so.

Despite this loss, 2012 will be a good year for Apple. It may be two years before we see if Apple can continue rolling out blockbuster products and opening new markets without Jobs there to reveal them. Choosing the best direction for evolving markets was a special gift that he possessed. Certainly other companies have tried to emulate Jobs’ brilliance—to little avail.

Attack Of The Androids

The Android OS may allow other OEMs to give Apple a run for its money. Google’s OS “for the rest of us” is Linux-based but designed for portable and Internet/transaction-centric devices like the smart phone. Android is open, so it is available for any company to license, and it has been used for dozens of phones and tablets.

In fact, as Internet-oriented features and touchscreen interfaces expand to other devices, so does the popularity of Android. Even in the seemingly closed Apple markets, Android opens a door. Sales data indicate that Android-based smart phones, with a market share of nearly 50%, have overtaken iPhone.

Memory Cyclone

Diverse microprocessors and microcontrollers are key to all electronic devices, but memory accounts for 20% of all semiconductor sales. This portion of the industry is subject to a vicious cycle of increasing demand and rising prices, followed by investment in new plants and equipment, resulting in oversupply and a crash in both price and profits. Right now NAND flash is following DRAM in a serious downswing.

The last couple of years have seen an increase in use of flash memory in solid-state drives (SSDs) to replace or supplement hard-disk drives (HDDs) in many uses. A few years ago, Apple’s iPods changed from HDD to flash. Two years ago netbooks moved from an all-flash model to HDD, but they have faded from a meager popularity since flash-based Apple iPads rejuvenated a previously failed tablet market.

The new ultrabooks—potential iPad competitors with touchscreens and ultraportable design—may be justification for increasing the laptop PC’s average selling price (ASP) from $300 to $1000, but it is not clear why consumers would warm up to such a price reversal. The higher price might allow for more flash in the laptops, but could push a DRAM price recovery out into 2014.

Objective Analysis models semiconductor investments with memories and a year ago forecast a slight (up to 5%) decline in 2011 for all semiconductors. This now looks to be quite accurate. We currently look for a 10% decline for semiconductors in 2012, a mild recovery around the middle of 2013, and finally strong growth (over 20%) to follow in 2014. But the cloud of the global economy may continue to weigh those numbers down.

More depth from the authors on topics mentioned in this article can be found on the Web at http://bit.ly/rEerRi and the Web sites of www.Objective-Analysis.com or www.StrategySanity.com.

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