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Latest IC Outlook: More Uncertainty

Analysis: Downturn is likely, but there are some bright spots.

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So far in 2020, it’s been a difficult period in the semiconductor industry amid the Covid-19 pandemic outbreak and other issues.

And heading into the second half of 2020, the industry faces more challenges, if not uncertainty, in the market. Many segments in the semiconductor industry face some headwinds, but there might be some positive news in the equipment business.

To be sure, it’s been a turbulent time in the industry. That was the case even before the pandemic. In fact, 2019 was a difficult year, thanks to a downturn in the memory market. Lackluster demand, microeconomic issues and trade disputes contributed to the woes.

But the industry looked promising at the start of 2020. The economy seemed sound. Demand was healthy.

Then, late last year, the Covid-19 pandemic struck China and then spread to other nations. Suddenly, a large percentage of countries implemented various measures to mitigate the outbreak, such as stay-at-home orders, store closures, among others. Economic turmoil and job losses soon followed, not to mention the human tragedy involved.

To one degree or another, the events have impacted every industry. Retail, transportation, and the service sectors are reeling. Automotive is stalled, while the energy sector is listless.

It’s a slightly better picture in the electronics, fab equipment, semiconductor and related sectors. Semiconductor and equipment vendors continue to operate and have held their own despite the difficult business climate. Some have fared better than others. Most have seen a decline in business.

Nonetheless, the industry is heading towards the second half of the year. So right now, what’s the outlook?

Chip/equipment forecasts
At the start of 2020, the chip forecasts were bullish. The forecasts ranged anywhere from 5.5% to 12% for the year, depending on the research firm. Semiconductor equipment vendors were also set for a strong year.

Covid-19 changed all that. Today, IBS, a research firm, has three different chip forecast scenarios for 2020—optimistic, realistic and pessimistic.

IBS’ realistic forecast calls for the semiconductor industry to decline by 11.7% in 2020 compared to 2019. The optimistic forecast is a 6.7% decline in 2020, while the pessimistic scenario calls for a 14.1% decline.

“Before, we had the realistic forecast going down by 10%. Now, with the new trade issues, we actually are going down 11.7%,” said Handel Jones, chief executive of IBS.

Jones is referring to a recent disclosure by the U.S. Department of Commerce, which announced new and stiffer export controls for Huawei. This in turn will likely impact chip sales for those companies that sell products to the Chinese telecommunications giant.

There are several unknowns here, however. “There are wide range of interpretations of the U.S. Department of Commerce’s guidelines provided on May 15, 2020, and the decisions during a 120-day grace period will be partly based on the financial impact to U.S. companies,” Jones said. “There are also wide range of actions that will be taken by China in response to U.S., and with high level of importance for Chinese leadership not to appear weak.”

The impact of Covid-19, coupled with trade issues and other factors, will have a chilling effect on the economy. “We’re going to have a major, major decline in the economic environment. Will it be a depression? Probably not. Will it be a deep recession? Yes. That’s going to impact the U.S and Europe. China also is being impacted,” Jones said. “We have U.S. GDP declining in Q1. Q2 is going to be even worse. In Q3, there is not going to be a recovery.”

It’s a mixed picture in the semiconductor sector. “In our realistic forecast, we do have some recovery in Q4. In the pessimistic forecast, we don’t,” he said. “Data centers are OK. But data centers only represent about 10% of semiconductor consumption. If you look at what Google is doing and Amazon and so on, it’s great. So that’s basically good for Intel’s data center business right now and good for some memory.”

There are also some geographic factors. China, the world’s largest chip market, represents more than 50% of the semiconductor business in terms of consumption. “50% of that is for consumption in China and 50% is re-directed for exports. That would include Apple, HP and so on. China’s economy is recovering. Exports are terrible. So, the exports are basically weakening and then you also have unemployment in China,” he said.

It’s not all doom and gloom. VLSI Research has raised its forecast for the semiconductor equipment industry. Previously, the firm predicted that the equipment business would fall by 6% in 2020.

Now, VLSI Research projects that the semiconductor equipment industry would see a positive 7% growth rate in 2020. This is due to the fact that chipmakers are moving forward with their fab capacity plans despite the turmoil in the market.

VLSI also sees some growth in the IC market this year. It is forecasting a modest 0.7% growth rate in 2020. All of these figures above could change, of course.

All told, the overall recovery in the worldwide economy and other sectors hinge on several factors. First, how long will it take the U.S. and other nations to contain Covid-19? Second, how fast will the economies of the U.S. and other nations bounce back? And finally, when will consumer confidence return?

The projections for these answers are all over the map. But clearly, China and South Korea are recovering after containing the virus. Taiwan contained Covid-19 from the beginning. All of those nations are dependent on exports and demand.

Foundry ups and downs
Over the last year, the foundry sector has fared better than most areas. Demand is strong for leading-edge processes. It’s a mixed picture in the mature and specialty process segments.

In April, TSMC predicted that the overall foundry industry would grow in the high single-digit to the low-teens percentage. 5G and high-performance computing were seen as the growth drivers.

That outlook was given before the new export control measures on Huawei. Now, under the new directive, TSMC has apparently halted new foundry orders to Huawei, which could impact TSMC’s bottom line. Huawei is one of TSMC’s biggest foundry customers.

What that means for other foundries and chipmakers remains unclear. But it’s not all doom and gloom for foundries. TSMC is ramping up its new 5nm process, while Samsung will soon follow. In total, 5nm foundry revenues are projected to reach $4.1 billion in 2020, compared to zero in 2019, according to IBS.

Not all of the action is at the high end. “Looking into the second quarter of 2020, despite significantly higher levels of uncertainty caused by the Covid-19 pandemic, current outlook indicates slightly higher wafer demand, mainly supported by inventory replenishment across computer peripheral and consumer electronics end markets,” said SC Chien, co-president of UMC, in a recent conference call.

Still, the overall outlook remains cloudy in the foundry sector in the second half and beyond.

Memory lane
For some time, the memory market has been in the doldrums. Oversupply, price pressures and lackluster demand have rocked the sector.

2020 appears to be another tough year. “The first quarter was not bad for memory. In the second quarter, there was some weakening,” IBS’ Jones said. “We do show the DRAM market will decline this year. We have the DRAM market down about 11% this year. The NAND market is down about 9%. So it’s not falling off a cliff. Basically, suppliers are managing supply and demand. There is some price erosion.”

The big market for memory is smartphones. IBS projects that smartphone shipments will reach 1.308 billion in 2020, down 13.61% from 2019. 5G smartphone shipments are projected to reach 210 million units in 2020, according to the firm.

It’s not all bad news for memory, especially for DRAM in data center apps. “If you’re in the data center, you get a price premium. So you can have blended prices that can give you profits,” Jones added.

Mixed picture for power semis
2019 was a slow year for power semiconductors, which consist of three segments–power integrated circuits, power discretes and power modules. Power ICs include IGBTs, power MOSFETs as well as gallium-nitride (GaN) and silicon carbide (SIC) devices.

Omdia, a research firm, now forecasts that the overall power semiconductor market will undergo a 6.9% decline in 2020, with revenues falling to $43.1 billion in 2020, down from $46.3 billion in 2019.

Power ICs for the wireless market are expected to decline this year. Automotive is another big market for power semis. Vehicle sales are likely to drop by a double-digit margin in 2020, according to Omdia. But rising electronic content in some automotive systems, such as advanced driver assist and vehicle electrification, will offset the decline, according to the firm.

Electric vehicles represent a small part of the overall automotive market, but they continue to grow. This in turn is driving demand for select chips, particularly those based on SiC. In electric vehicles, SiC is used for DC-to-DC converters, on-board chargers and traction inverters.

“While our automotive customers are addressing near-term challenges, including some temporary shutdowns of their operations due to the outbreak, most have indicated they remain committed to delivering electric vehicles to the market with silicon carbide on their original timelines. Additionally, design and activity for the longer-term programs remains very robust,” said Gregg Lowe, chief executive of Cree, in a recent conference call.

This same is true for GaN-based power semis. “The pandemic has certainly harmed all world economies, and the end point of the economic impact is not known,” said Alex Lidow, chief executive of Efficient Power Conversion (EPC). “GaN, however, appears to be weathering this storm pretty well, driven by two large applications that started ramping in the beginning of the year and will continue throughout 2020 and 2021. The first application is AC-DC adapters. As fast-charging has taken hold in the latest cell phone generations, the requirements for chargers has increased from 5 W a few years ago to as high as 45 W. The second major application that is ramping sharply is 48 V input DC-DC converters that are native to the high-density server board. Overall, 2020 should be a growth year for GaN. 2021 should be even better as even more major applications launch.”

More markets
After 10 years of record-high sales, combined revenues for optoelectronics, sensors/actuators, and discrete (O-S-D) semiconductors are expected to drop 6% in 2020, according to IC Insights.

However, the forecast shows total O-S-D sales rebounding in 2021 with sales growing 9% to set a new record-high combined total of $88.1 billion, according to IC Insights.

The O-S-D forecast may foreshadow other semi sectors. With that in mind, 2020 looks like a long and tough year for most semi products. Look for better days in 2021.



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