Semiconductors Send Mixed Signals in 2007

In the United States, producer prices for semiconductors have been receding 3–4% per year recently. But during the first half of 2007, prices fell by 7.0% year to date, and should end up declining 8.9% over the full year. Likewise, the average selling price (ASP) for semiconductors has been showing some weakness as of late, following some strong years; 2004 and 2005 saw average annual gains of 5.2%, but the ASP slipped in 2006 and this year is down 4.9% year to date through August. NAND and NOR flash memory have bounced back after early weakness, while ASIC, FPGA, microcontroller, and microprocessor pricing has been mixed. DRAM memory, however, remains mired in a major slump. If nothing else, spot DRAM markets have proven their volatility over the last several years. Renewed strength was seen in spot DRAM prices during 2005, as demand for computers returned to robust levels. Spot DRAM prices had posted a significant increase in 2004, up to a 12-week average of $4.823 by the beginning of June—its highest level in more than two years. Inventories outpaced demand, however, and the spot price retreated, falling to $3.276 by the year-end 2005. They then rose to $4.482 in the last week of December 2006, before dropping to $2.004 by the third week of October 2007—its lowest level since 2001—driven down by the recurring theme of excess inventory.

Starting late last year, U.S. semiconductor industry utilization rates began to slide—from 84.5% in October 2006 to 71.6% in May 2007, but have recently perked back up to 74.9% in September. Capacity utilization worldwide has been slightly higher and more robust, coming in at 86.4% in the fourth quarter of 2006—down from rates typically exceeding 90%—before rising to 89.7% in the second quarter of this year. Consequently, investment in semiconductor manufacturing equipment has recently been slowing, albeit from record highs. The book-to-bill ratio for semiconductor equipment manufacturers has dropped below 1.0, starting at 0.98 in February 2007 and then falling to 0.81 by September. Investment in semiconductor manufacturing equipment has seen several strong years, but these substantial equipment purchases, weak prices, and soft utilization rates provide little incentive to invest now.

Through all of the supply concerns, demand has stayed quite strong and unit sales remain up. Through August 2007, unit sales are up 9.5% year to date. Global Insight views 2007 as a year of cautious optimism, with world sales growing 2.0%, to $252.7 billion. The market should continue to expand in terms of unit shipments, but the overall ASP will remain under pressure. One reason for the forecasted growth is the anticipated robustness in key end-markets—namely, consumer items like digital TVs and cameras, cell phones, and MP3 players—as the semiconductor content swells, enabling lower costs with improved functionality. Moving into 2008, the industry should maintain this healthy expansion, as the adoption of leading-edge chip manufacturing technology, particularly continued investment in 300mm wafers and the introduction of the 45nm manufacturing process, take root.