What’s The Outlook For ICs?

As the semiconductor industry heads into the second half of 2016, it’s time to take the pulse of the IC sector.

Based on the current signs, there’s a faint pulse, if that. Simply put, the IC market has been in the doldrums in the first half of 2016. And it looks sluggish heading into the second half.

It wasn’t supposed to be like this. At the beginning of this year, many predicted a flat to slightly up year in terms of IC revenues in 2016, although some were looking for a soft to strong recovery by now.

So far, though, there are no signs of a rebound. And based on a small sampling size from a few research houses, the outlook remains somber.

For example, Gartner and IDC recently projected that the semiconductor industry will experience a decline in terms of sales for both 2015 and 2016. If the figures are indeed negative in 2016, this would represent the second time in history in which the IC market would have two consecutive years of revenue decline, according to Gartner.

Other research firms may have different numbers, and perhaps even positive figures, but the trends are all pointing in the same general direction.

For example, IDC projects that worldwide semiconductor revenue will reach $324 billion in 2016, down 2.3% from 2015. The firm’s forecast is based on several factors, including an economic pause in China, a slowdown in smartphones and an ongoing decline for PCs.

China’s economic headwinds are contributing to the sluggish demand picture in the worldwide semiconductor market. For example, China’s smartphone business has been an engine for growth for many IC makers.

The nation is the world’s largest smartphone market, accounting for nearly one in three of all 334.6 million smartphones shipped globally in the first quarter of 2016, according to Strategy Analytics. But in a worrisome sign, China smartphone shipments declined 5% in the first quarter, due to market saturation and an inventory glut, according to Strategy Analytics.

The situation isn’t much better in the fab equipment sector. Worldwide semiconductor capital spending is projected to reach $62.8 billion in 2016, down 2% from 2015, according to Gartner. This is up from the estimated 4.7% decline in Gartner’s previous quarterly forecast. In 2015, worldwide semi CapEx fell 0.8%, according to the firm.

“While the first quarter 2016 forecast has improved from a projected decline of 4.7% in the previous quarter’s forecast, the 2% decline in the market for 2016 is still bleak,” said David Christensen, an analyst at Gartner. “Excess inventory and weak demand for PCs, tablets, and mobile products continue to plague the semiconductor industry, resulting in a slow growth rate that began in late 2015 and is continuing into 2016.”

On top of that, Gartner also projects that IC revenue will reach $333 billion in 2016, a decrease of 0.6% from 2015. This is following a decline of 2.3% in 2015.

Any good news?

Still, the big question is clear—Are there any bright spots in the second half of 2016 and beyond?

There is a smattering of good news. IC Insights sees strong growth in several IC product categories in 2016. Cellphone application processors are expected to grow the fastest this year with 10% growth, followed in order by signal conversion devices (10%) and 32-bit MCUs, according to IC Insights. MCUs are forecast to increase by 8%, due to growth in automotive and “intelligent” cars, according to the firm.

There are other bright spots as well. “In the next six to twelve months, the IoT will definitely drive IC volume, not just on the consumer side but also on the industrial side as existing monitoring and control infrastructure is upgraded for network connectivity,” said Luke Schreier, director of product management and marketing at National Instruments (NI).

“Regulatory activity around vehicle-to-vehicle (V2V) and vehicle-to-infrastructure (V2I) for automotive infotainment and driver assist will also generate demand,” Schreier said. “And with all the research in wireless technologies like 5G, WiGig and 802.11ax, we’re going to see activity increase on the equipment side.”

On the fab tool side of the equation, there are also some positive signs. Citing increased demand for 10nm foundry processes and 3D NAND in 2017, semiconductor capital spending is projected to grow by 4.4% next year, according to Gartner.

“We’re seeing increased demand for testing RFICs, automotive analog, and various parts of the IoT device supply chain,” NI’s Schreier said. “There’s also the explosion of sensor technology.”

And it’s not all doom and gloom on other fronts. “On a brighter note, it’s good that the photomask market is growing modestly amidst an overall down market in semiconductors. It makes sense as multiple patterning and the increased need for greater process latitude for wafer manufacturing are increasing the number of precision masks needed for each chip. This is good for mask equipment manufacturers,” said Aki Fujimura, chief executive of D2S.

Time will tell if the market will rebound in the second half. But without a clear “killer app” or market driver, though, it looks like tough sledding throughout the rest of the year.

“It’s concerning for me that the semiconductor industry is going into a down market again. I think we all would much rather live in an up market if we had the choice, as it’s much easier to have a win-win scenario between customers and suppliers. Down markets invite lose-lose behavior,” Fujimura said. “In a shrinking market, we must grow our companies by growing our market share, instead of floating with the tide, but this leads to a win-lose mentality, which usually ends up leading to lose-lose. One way to address this is to consolidate, which we’re seeing more examples of lately. Consolidation is a form of win-win — at least in the aggregate even if the politics within after the fact don’t look that way. I believe that win-win is still the way to go, even in a down market. We all have to pick our partners carefully, then win as a team together.”