Semiconductor Suppliers Won’t See a Bright Holiday Season

El Segundo, Calif. (Dec. 14, 2012)—Pressure from a weak global economy will cause global semiconductor revenue to shrink by year-end, erasing the gains made by the industry last year, according to an IHS iSuppli Semiconductor Manufacturing & Supply Market Tracker Report from information and analytics provider IHS (NYSE: IHS).

Semiconductor silicon revenue will close the year at $303 billion, down 2.3 percent from $310 billion in 2011. The projected decline comes in contrast to the 1.3 percent gain made last year.

This year will end on a decline, with worldwide semiconductor revenue set to decrease by 0.7 percent in the fourth quarter compared to the third, as shown in the figure attached, which presents the IHS forecast from November.

“The global economy continues to be the most critical variable affecting the semiconductor space both this year and the next, especially because the chip industry is highly dependent on consumer spending,” said Len Jelinek, director and chief analyst of semiconductor manufacturing at IHS. “And until consumers believe their financial position is stable or improving, consumer spending will likely remain soft.”

The complete reversal in growth is indicative of how distressing conditions have become for the industry, and the downward pressure on sales has not eased. With final numbers yet to come in, fears abound that industry revenue could decline even more than currently predicted in the fourth quarter, if economic conditions do not improve.

Taking inventory

The level of semiconductor inventory is a significant concern.

Adding to widespread worries, the industry has not been able to reduce inventory within the channel or at chip suppliers. Given the excess inventory, end-equipment manufacturers have been delaying the placement of orders for additional components. The result on the whole is that chip suppliers aren’t running their manufacturing operations optimally, and also are manufacturing products solely based on historical demand. In some instances, projected demand does not materialize as well, adding to the already slow-moving inventory pile.

Holiday letdown

As the year ends, the market finds itself at a difficult juncture, with no significant drivers in sight that will increase demand for silicon suppliers during the near term. All of the initial orders for manufacturing electronics systems that were anticipated for the holiday selling season have already been completed. And while the next opportunity for increased silicon demand will take place at the end of November when companies reorder components, market demand at that time will be small.

2013 rebound

Prospects brighten next year, with silicon shipments tentatively expected to climb late in the first quarter, when companies achieve equilibrium between inventory and demand. That, however, is more than three months away—and anything could still happen to further derail the fragile growth scenario.