By Adrienne Downey, Director of Technology Research, and Joanne Itow, Foundry Analyst, Semico Research Corp.

Adrienne Downey

The disaster unfolding in Japan due to the Tohoku earthquake has raised much uncertainty in the semiconductor industry.  It would be easy for us to look at the worst possible scenario, but is this the most likely one?   Semico recently released a semiconductor capital expenditure forecast of 15% growth for this year, which is on top of the 91% increase seen in 2010.  In light of the tragic events in Japan, is 15% growth too aggressive or not aggressive enough?  Will companies increase capital expenditures to cover the lost capacity in Japan, or will the industry have to curtail production industry-wide, lessening the need for additional capacity?

Let’s see:  out of the 59 companies covered in Semico’s capital expenditure  forecast, only twelve have fabs in Japan.  Their capex represents 19% of the total, but a sizeable amount of that is for fabs in other regions (ON, TI, Micron, and UMC, for example).

Nine out of the top 20 semiconductor companies plan to grow their capex spending in 2011, all at double- or even triple-digit increases.  Four out of those nine maintain fabs in Japan.  For example, Toshiba planned to increase capex from $1.6 billion in 2010 to $1.8 billion in 2011.  Much of Toshiba’s spend was targeted at the completion and ramp of Fab 5 in Yokkaichi.  Renesas announced plans to increase capital expenditures by 52%, going from $491 million in 2010 to $748 million in 2011.

The damage to semiconductor fabs in Japan has been pretty minimal, all things considered.  Freescale was already in the process of closing their Sendai fab, so capital spending is most likely concentrated at its other fabs.  Texas Instruments will need to spend more in capex to return its Miho fab to full production. The fab’s infrastructure was damaged, but the building itself is sound.  In the short term, TI made arrangements to cover most of the production output from their affected facilities.  ON Semiconductor’s fabs sustained minor damage, as did two of its back-end packaging facilities.  Panasonic, Elpida, Renesas, Sony, Rohm, Fujitsu and Hitachi are among those with damage to their fabs.

For companies headquartered outside of Japan, capital spending forecasts for 2011 should remain unchanged.  Intel has pledged a massive 73% increase in capex this year.  After spending a record $10.9 billion in 2010, Samsung has reduced its forecasted spending in 2011 to $9.2 billion, a 16% decline.  STMicroelectronics will increase spending to expand production of MEMS, automotive ICs and ST-Ericsson’s U8500 smartphone platform.

Semico forecasts an 11% growth in wafer demand this year.   Although expected capacity additions will more than cover the expected unit growth in 2011, the expansion plans currently in place may not be in the right places.   Shortages in certain product categories could still be possible in the short term.  In addition, material supplies will be tight for at least several weeks, and spot shortages in the short term are a real possibility.

The importance of second-sourcing and maintaining manufacturing locations or relationships in different geographic areas has never been more apparent.  But the semiconductor industry is strong; it can and will overcome these challenges.  The semiconductor industry always finds ways to be more efficient.  There are many companies that are willing and able to step up to the challenge of filling the gaps as a result of this devastating disaster.

Let’s give Japan all our support, for a recovery of semiconductor industry operations there will help the Japanese people, and it will help us.   For more details regarding Semico’s capital expenditure and wafer demand reports please visit our website.

By Jim Feldhan, Semico Research

Nuclear Power Situation

The damaged nuclear generating facilities continue to spiral out of control.  Not only are there three reactors damaged, now the spent fuel storage facilities are in serious trouble.  Similar to the reactors, the storage units need to be water-cooled.  The largest storage unit at the Daiichi Plant, containing 130 metric tons of nuclear material, is exposed and overheating.  The situation is dire.  Helicopters are being used to drop sea water on the reactor in a desperate attempt to cool the overheating nuclear material.

Semico recommends using the same solution that was used by Russia during the Chernobyl disaster. Japan should use the military to dump sand and boric acid over the reactors and spent fuel and then encase it in concrete.  This is a very large facility and would require an enormous amount of sand, boric acid and concrete.  However, it would appear that this is the only solution containing the radioactive material which is now exposed to the atmosphere.

The two damaged nuclear plants have created an electrical power deficit for the island.  The quicker these plants are sealed and contained, the quicker resources can be allocated to repair other parts of Japan’s infrastructure.  Japan’s electrical grid system includes ten utility companies.  Our research indicates that extra-high voltage transmission lines link the entire country from Hokkaido in the north to Kyushu in the south.   The companies work together to exchange electricity to provide power in the most efficient manner possible in order to cope with emergency situations.  These companies also take part in the cooperative development of electric power technology and the sharing of resources.

Semiconductor Industry Impact

Damage reports released in the past few days confirm our original assessment.  There are only a few semiconductor manufacturing fabs that sustained substantial damage.  Texas Instrument’s fabs in Japan accounted for 10% of the company’s revenue, and within three days arrangements were already in place to cover 60% of the production output from the affected facilities.  Maxim Integrated Products reported no structural damage to its partner facility, Seiko Epson.  However, the power outage has affected production at the facility located in Sakata, Japan.  The facility provided approximately 15% of Maxim’s wafer starts last quarter.  Maxim stated that all products manufactured at the Seiko Epson facility could be manufactured at other facilities.

Consistent and reliable electric power supply is still a major issue in Japan’s return to normalcy.  Semico believes that high tech and other key industrial facilities will get high priority.

There is still concern over the material suppliers that provide wafers and other materials for both the manufacturing and packaging of semiconductor chips.  Shortages of those materials could have a broader industry impact causing bottlenecks in the production cycle worldwide.  However, the semiconductor industry is resilient and flexible.  Semico believes that in times of shortage companies will find ways to increase efficiencies and improve productivity per wafer.  In addition, alternative sources of supply will also be found.  There are many companies that are willing and able to step up to the challenge of filling the gaps as a result of this devastating disaster.

by Jim Feldhan, president, Semico Research Corp.

Seasonally, the first half of most typical years, semiconductor sales are weak and not necessarily indicative of a downturn. This year however, the first half will be up over 2%, a healthy growth rate after the 31.8% increase in revenues the industry experienced in 2010. 2011 represents a return to the “normal” semiconductor cycle, averaging an 8% increase in revenue YOY.

There has been excitement in the industry lately for the consumer and automotive markets, and the memory and IP markets. There has been significant innovation in the consumer market with Smart TVs changing how the average consumer interacts with technology in their living room and tablets changing how toddlers learn about the world. Microsoft’s Kinect is changing the way gamers understand games (though of course, Nintendo led the way). This bodes well for the semi industry in the coming year.

The consumer industry has a ripple effect down the supply chain, and in the memory market, Semico expects unit shipments of NAND will grow 13.4% in 2011, surpassing 6.0B units. The growth of the Tablet PC market in 2011 is gobbling up a significant portion of the total NAND shipment, as will the growth of smartphones and memory cards. Even the DRAM industry will be diversifying away from a commodity-centric focus to accommodate memory demand for smartphones, tablet PCs, social networking, 3DTV , and Blu-ray.

To understand how these changes affect the overall market, Semico created the Inflection Point Indicator (IPI) as a forecasting tool that can predict semiconductor revenues approximately four quarters in advance. Combined with end-market analysis, we can accurately predict the ups and downs of the industry.

Source: Semico Research Corp.

The previous twelve months on the blue line is the forecast for the pink and green line. On the graph above, the blue line is showing a small decline followed by a large incline, indicating the seasonal decline in the first quarter followed by a strong increase (10%+) in the second quarter.

The industry news supports what our Inflection Point Indicator (IPI) has been showing all year. For eight years the IPI has been an accurate forecasting tool to know far in advance the industry will swing up or down. If you’d like to subscribe to our IPI to stay ahead of the news in 2011, contact Sam Caldwell at samc@semico.com or 602-214-9697.

About Semico

We are a semiconductor marketing & consulting research company located in Phoenix, Arizona. Semico was founded in 1994 by a group of semiconductor industry experts. We have improved the validity of semiconductor product forecasts via technology roadmaps in end-use markets. Semico offers custom consulting, portfolio packages, individual market research studies and premier industry conferences.