The economic outlook for the world is dismal, the semiconductor industry has consolidated and matured to the point where it’s looking for tips from the automotive industry, and unprecedented challenges must be overcome to stay on the path defined by Moore’s Law. This negative news, delivered during the first day of SEMI’s Industry Strategy Symposium (ISS), was offset by projections that the world has so embraced electronic devices that the use of transistors is expected to skyrocket over the next decade, growing 15X in the next five years, and another 15X in the five years after that. “We’re barely at the beginning,” said Bill Holt of Intel in the keynote. “The next ten years will make the previous 40 years look like a flat line,” he said, showing the worldwide transistor demand growing from 5 quintillion in 2005 to 75 quintillion in 2010 and 1100 quintillion in 2015 (see figure). Holt is the senior vice president and general manager of the technology manufacturing group at Intel.
Among the devices driving the transistor explosion are new ultrabooks – more than 50 were introduced at the Consumer Electronics Show (CES) according to Shawn Du Bravac, chief economist and director of research at CEA, who also spoke at ISS. He noted that the makers of the ultrabooks were not touting performance, as has often been the case in the past, but industrial design elements such as the thinness or aluminum casings. He said the future was all about ubiquitous connectivity, where mobile devices could connect with everything from your thermostat in your home (it uses GPS tracking to know to power down when you leave the house, and power up when you’re five minutes away from returning) to the stereo in your car.
The economists speaking at ISS were less positive about the world economy, however, predicting a recession in Europe (which seems increasingly inevitable), the impact of massive government debt in the US, concerns of a slowdown in China and general world volatility. “World growth will slow in 2012,” said Duncan Meldrum of IHS. “It’s only a question of how much.” Meldrum is senior director, center for forecast and modeling. He said in the most likely scenario, world growth will slow from 3% in 2011 to around 2.7% in 2012 – continuing a path of subpar performance relative to “normal” recoveries. He said weak recoveries are usually due to uncertainty in markets, caused by government debt reaching extreme levels, and euphoric spending leading to excessive investment and asset bubbles (e.g. housing). “It’s difficult to get any return on investment of any kind,” he said. The one bright spot from Duncan’s talk: The US economy will “muddle through” 2012, with very little risk of inflation.
Duncan concluded with two nightmare scenarios. The biggest risk is a “Lehman moment” in Europe with some small countries exiting the Eurozone and/or a messy default by one or more large Eurozone countries, especially Italy or Spain. This scenario would drag the rest of the world into recession. The second big risk is a sharp slowdown in China (to around 5%), triggered by a bursting of the real estate bubble. This scenario would have the biggest impact on the rest of Asia and the commodity-exporting emerging markets. Although he said the probability of each of these scenarios is only in the 20% to 30% range, either scenario would pull semiconductor growth rates negative in 2012.
Meldrum’s presentation also included the IHS “top ten” list for 2012:
1. The United States will probably avoid a recession. Domestic risks have diminished somewhat and growth momentum has picked up modestly. Consumers seem willing to spend and businesses are more disposed to hire, but fiscal tightening continues, household deleveraging continues, housing is still in excess supply, and export prospects have dimmed. This means that 2012 growth is likely to come in between 1.5% and 2%. The Eurozone sovereign-debt crisis is the biggest threat to the U.S. economy. The longer-term outlook is clouded by uncertainty over how America’s burgeoning sovereign-debt problem will be fixed.
2. Europe is headed for a second dip. All forward-looking indicators suggest that Europe is headed for (or already in) a recession. It will be a mild downturn if the region’s sovereign debt problems are resolved or a deep one if they are not. Fiscal austerity is in full swing, bank credit is tightening, and confidence is plummeting. Few, if any, countries will be able to avoid negative growth. The Eurozone economy will likely contract by around 0.7%. The U.K. economy can only be expected to eke out a 0.3% growth rate next year, with the distinct possibility that it could be worse.
3. Asia will continue to outpace the rest of the world. Asia will not be immune to a Eurozone recession, but strong growth momentum and economic resilience will help the region grow around 5.5% in 2012. Japan’s post-earthquake rebound will help underpin the region’s exports, offsetting some of the weakness in sales to Europe. Chinese growth can be expected to hold up (7.5% to 8%), also bolstering regional growth prospects, provided China’s housing downturn does not evolve into anything much worse. Last but not least, easing inflation will give all Asian governments the leeway to provide policy stimulus if necessary.
4. Growth in other emerging markets will (mostly) hold up. The Eurozone crisis will have a differential impact on the rest of the emerging world. Hardest hit will be Emerging Europe, since Western Europe is its most important export destination, and because the region is dominated by subsidiaries of Western European banks – all of which are tightening credit. Latin America, the Middle East and Africa are relatively more vulnerable to the United States, China and the rest of Asia. Barring a catastrophe in Asia or North America and/or another plunge in commodity prices, growth in these regions should hold up fairly well in the coming year.
5. Commodity prices will (mostly) move sideways. Commodity prices will get pulled down by weaker growth in the developed world, and pushed up by limited spare capacity and continued robust growth in key emerging economies, such as India and China. The biggest demand-side risk is the possibility of a hard-landing in China. Supply-side risks are commodity-specific. In the case of oil, markets are worried about an escalation of conflict over Iran’s nuclear weapons program. Bottom line: the most likely scenario for the price of oil and other commodities is fluctuations around current levels.
6. Inflation will diminish almost everywhere. With world growth softening and commodity prices off their peaks, inflation in every region (and almost every country) will decline in 2012. The disinflationary process will be most pronounced in the developed world, because of vast amounts of excess capacity in both labor and product markets. In the emerging world, the recent declines in food prices are having the biggest impact. Without a spike in food or fuel prices – triggered by geopolitical events or bad weather – the inflation picture in 2012 will be quite benign.
7. Monetary policy will either be on hold or ease further. Easing inflationary pressures and increasing anxiety about the growth outlook have changed the priorities of central banks worldwide. Central banks with policy rates already at or near zero (the Fed, Bank of England and Bank of Japan) will keep rates low, indefinitely (or at least for a couple more years), with further quantitative easing likely. Some central banks that had been raising rates have now stopped (e.g., the Reserve Bank of India). Others that had been tightening have reversed course and are now easing (e.g. the European Central Bank and the People’s Bank of China).
8. Fiscal policy set to tighten further in the US and Europe. Notwithstanding the policy deadlock in Washington, U.S. fiscal policy is already tightening. Federal government purchases (in real terms) will contract over the next several years, acting as a major drag on growth. State and local spending is also expected to fall for at least another year. The payroll tax cut will probably be extended for another year, limiting any extra tightening. In Europe, not only are the most indebted countries (Greece, Ireland and Portugal) in the midst of tough austerity programs, but three of the four largest Eurozone countries (France, Italy and Spain) are being pressured to drastically cut budget deficits and sovereign debt levels.
9. With the exception of the euro, the dollar will keep sliding. Economic fundamentals suggest that the dollar should keep sliding against most currencies. The U.S. current account deficit is still huge, and both growth and interest rate differentials favor emerging market currencies. However, as long as the Eurozone crisis drags on, the euro is likely to depreciate against the dollar – reaching around $1.25 by next spring. In a Eurozone financial meltdown scenario, the euro could easily go to parity against the Greenback – or lower. In such a scenario, the dollar would likely also rise against most currencies – as it did in the fall of 2008.
10. Most of the risks to the outlook are on the downside. The two biggest risks are a “Lehman moment” in Europe and a sharp slowdown in China.
What can the semiconductor industry learn from the automotive industry (where companies enjoy an enviable operating profit of 5% year after year)? Steve Newberry, vice chairman of the board of directors of Lam Research said that 60% of R&D is spent by suppliers. “Auto manufacturers have closely coupled relationships with their suppliers in R&D, which promotes systems-level innovation,” he noted. “This has manifested in contracted R&D and about half the auto manufacturer’s budget.” Elements that are necessary are close collaboration with suppliers and customers, and an integrated approach to design and development. The benefits to the OEM with this approach include faster time to market with innovations, the ability to lock in designs and production early in the development of an integrated product, contracts with multiple outside experts instead of having experts on staff in every area and efficient use of cash. Benefits to the supplier include significant funding for development work, a close relationship with customer in understanding design requirement, a mutual dependency – a shared destiny for success --which increases collaboration and results in a better product and integrated system design, and a “lock-in” to production design. The benefit to the industry as a whole is more efficient use of R&D funds, and less waste on designs that won’t be used. “Are there aspects or elements of this more mature industry that we should, at a minimum, at least dialog in this industry -- talk about between the big IC manufacturing companies and the equipment and the materials suppliers?” Newberry asked.