Analysis: IC market gloom won't last

Tired of all the gloom-and-doom annual forecasts for the worldwide economy and IC industry?

It's true that, when viewed on an annual basis, the 2009 worldwide economy will be classified as a global recession and the 2009 IC industry will register negative growth.


However, when viewed on a quarterly basis, a 'bottom' period and a 'recovery' period are highly likely to be encountered within the next 9 months. So, before we all go looking for tall buildings to jump off of, let's step back, take a deep breath, and look at some very powerful and positive forces that will be at work in 2009.


These include :

1. Stimulus packages

China has announced a $586 billion economic stimulus program to take place throughout 2009 and 2010, the Euro-zone recently announced a $256 billion stimulus package, the United Kingdom could have a $45 billion package itself, and the United States is expected to announce up to an $850 billion stimulus package in late January or early February of next year.

There is little doubt that, in total, worldwide stimulus packages, including from Taiwan, Singapore, Japan, Australia, Brazil, etc., will likely approach $2 trillion over the next two years. This is powerful medicine for a sick economy.

2. Lower interest rates

U.S. interest rates are at an historic low (now zero percent to 0.25 percent) and are expected to remain at these levels for some time. Moreover, the rest of the world is also moving to significantly lower interest rates.

In addition to record low interest rates, the U.S. Federal Reserve is initiating a massive purchase program for mortgage-backed securities. Already, 30-year fixed loans have dropped below 5 percent. Many economists now expect 30-year fixed rate mortgages in the United States to drop to as low as 3.5 percent over the next six months.

This could easily cause the biggest surge in refinancing of mortgages the United States has ever seen and will surely have a major positive impact on the U.S. housing market in the second half of 2009.

3. Falling oil prices

A strong positive factor for the worldwide economy heading into 2009 is the relatively low price of oil. As of this writing, the price per barrel of oil was about $40, down from $147 per barrel in July of this year.

As a result, U.S. gasoline prices averaged only $1.65 in early December after reaching a high of $4.11 this past summer. This is an extremely important factor for the future of the worldwide economy since for every one cent of decline in gasoline prices, an annualized savings of $1 billion is realized!

Having the exact opposite effect of rising oil prices, low oil prices have historically set the stage for a rebound in the worldwide economy.


With the average price per barrel of oil expected to decline by over 30 percent in 2009 as compared to 2008, the price of oil will transition from being a 'headwind' on the fortunes of the 2008 worldwide economy to a 'tailwind' next year.


IC Industry comparisons to 2001


The abrupt decline in chip sales in the fourth quarter has many people comparing the current situation with the 2001 IC market.

While the recent swift change from a positive to a negative direction is similar to 2001, IC Insights believes that there are some significant differences.


In 2001, the IC industry encountered the perfect storm of four negative influences, including a huge inventory build, excess capacity, a global recession and a severe decline in electronic system sales.


For 2009, IC Insights believes the IC industry is facing one of these same factors and a portion of another. In 2009, the IC industry will face a global recession and a decline in electronic system sales, but the decline in system sales next year is expected to be a single-digit decline as compared to a steep 14 percent decline in 2001.


Also, there have been some comparisons made recently that the excess semiconductor inventory expected in the fourth quarter would begin to approach the excess inventory level of the first quarter of 2001.


However, it should be remembered that the semiconductor industry was at a $150 billion run rate in 2001. Thus, it would take a lot longer to burn off a similar amount of inventory in 2001 than in today's $250 billion industry.


Moreover, in 2001, there were 945 million cell phone subscribers compared with 4 billion today. The semiconductor and electronics industries are much bigger and broad-based today than they were 8 years ago.


With all of the comparisons between the worldwide economic recession of 2001 and the downturn in 2009, one key difference will be the positive economic force of China in this downturn that was not present in 2001.


In addition to the economic stimulus that China will inject into the worldwide economy next year, the country has recently implemented a program to subsidize the purchase of cell phones and flat screen TVs -- remember, China has the world's largest base of cellphone subscribers).

First sharp drop, then quick growth

We are sure most people have seen the dour forecasts for the 2009 IC market from various market research firms—predictions that currently range from a decline of 6 to 16 percent.

The gloomiest forecast, an annual decline of 16 percent, sounds very bad. However, if you examine this forecast on a quarterly basis, you would likely see a very different picture.

If first quarter 2009 registered a 7 percent sequential IC market decline, followed by a 2 percent drop in second quarter 2009, a 15 percent increase in the third quarter, and a 5 percent increase in the final quarter, a year-over-year decline of 16 percent would result.

Thus, even when examining a gloomy full-year forecast for a 16 percent sales decline for the 2009 IC market, one could still expect to see significant quarterly growth beginning in the third quarter.

In fact, the market could register a 17 percent sequential sales increase in the second half of 2009 over the first half of the year.

IC Insights' McClean Report, to be released next month, forecasts the IC market will decline by at least 10 percent next year. However, on a quarterly basis, IC Insights is forecasting a significant rebound in the IC market beginning in the third quarter of the year.

Overall, the economic issues facing the world at this point are unprecedented and massive. However, the worldwide response, thus far, is also unprecedented and massive. While nobody knows what the future will hold, it is a safe bet that things will not be stagnant.

A number of new programs, laws, stimulus packages, tax-breaks, and incentives are likely to be enacted worldwide throughout next year. There is little doubt that the next two quarters will be very challenging for businesses worldwide.

However, the worldwide economy in the second half of 2009 is also likely to begin showing some traction from the economic programs that are currently in place or in the pipeline, and a recovery from the recessionary gloom that is now so pervasive will begin.

Given the typical seasonal strength in the electronics industry in the second half of the year, pent-up demand for electronics during the worst part of the global recession from the third quarter of 2008 to the second quarter of 2009 and a recovering worldwide economy, the second half 2009 IC market could surprise on the upside.

The best holiday gift we can offer you is expectation for a better business environment next year.

If you consider the worldwide economy and IC market on a quarterly basis instead of annual one, you can begin to form a positive outlook about the "other side" of this downturn, in the second half of 2009 and beyond.

Bill McClean is president of market research firm IC Insights Inc.

Data Sources:

Posted 2009-1-22 13:22 by Lilian
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