Recent industry analysis points to modest growth in the semiconductor market this year as rising inventory levels and growing sales compete with a sluggish overall economy. Market reports released early this summer pointed to rising inventory levels among both suppliers and customers during the first quarter of 2012 as a sign of improving overall market conditions. An upward sales trend in the spring fueled the momentum, assemiconductor companies reported the longest streak of sequential monthly sales growth—from March to May—since September 2010.
Though sequential sales among semiconductor companies have been rising, they remained below year-ago levels as of May, according to the Semiconductor Industry Association (SIA), which tracks monthly sales data among semiconductor companies. SIA’s Global Sales Report (GSR) is a three-month moving average of semiconductor sales activity. It’s tabulated by the World Semiconductor Trade Statistics (WSTS) organization, which represents about 66 semiconductor companies worldwide. Global semiconductor sales in May were 3% lower than they were in May 2012, and year-to-date 2012 sales were down as well.
On the positive side, combined global sales for the March-May period rose 6% compared to the December-February period—the highest rate of increase in nearly two years.
“The upward trend of global semiconductor sales is encouraging,” said Brian Toohey, the SIA’s president and CEO. “Recent sales totals are in line with industry projections of modest growth for the remainder of 2012, but a sluggish global economy continues to provide substantial headwinds, limiting more robust growth.”
Regionally, semiconductor sales increased nearly 11% in Asia-Pacific, 4% in Europe, and 2% in the Americas over a three-month moving average. Although May sales fell slightly in Japan by 0.7%, the country saw a slight increase in year-over-year sales for May—0.4%. All other regions saw year-over-year decreases in May. Asia-Pacific was down 2%, the Americas were down 3%, and Europe was down nearly 14%.
Demand Creeps Up
The upward sales trend followed earlier news that more balanced supply and demand dynamics were at play. Industry analyst firm IHS reported growing demand across the semiconductor market in early June, noting inventory level increases among both semiconductor suppliers and customers in the first quarter of the year. The news indicated a potential recovery in demand, as both suppliers and customers adopted a more positive outlook.
On the supplier side, the first-quarter increase marked the second straight quarter of inventory growth. Total semiconductor inventory as a percentage of suppliers’ revenue amounted to 50% in the first quarter, up from 48% in the fourth quarter of 2011 and 46% in the third quarter.
“In the fourth quarter, inventory rose among suppliers because of uncertain macroeconomic conditions such as the sovereign debt crisis in Europe, leading to an overall decline in the worldwide demand for semiconductors,” said Sharon Stiefel, semiconductor inventory analyst at IHS. “And while inventory rose during the fourth quarter for semiconductor suppliers, chip stockpiles fell at the same time among customers, indicating a paucity in demand. In contrast, the higher inventory numbers among semiconductor suppliers for the first quarter of 2012 represent a signal of better things to come.”
Inventory trends among distributors, EMS providers, OEMs, and others in the final quarter of last year revealed a broad-based decrease in stockpiles among major semiconductor purchasers, the report also noted. For instance, customer inventory held by electronics distributors fell to 37% of revenue in the fourth quarter—down from 42% in the third quarter—with similar decreases occurring among the other customer groups.
“In the first quarter of 2012, however, suppliers saw order bookings fill up, allowing them to gain greater visibility into the supply chain. Book-to-bill ratios are also close to reaching parity, indicating more balanced supply-and-demand dynamics. Such developments, combined with anticipated higher demand for the second quarter, led to a rise in inventory as a percentage of supplier revenue during the first quarter, giving the market fresh reason to cheer,” the report concluded (see the table).
Rising Demand Spells Rise In Counterfeits
While growing demand for semiconductors is good news, it also comes with a risk. Earlier this year, IHS warned of a rise in counterfeit components as the semiconductor market begins another accelerated growth phase. Citing a historic link between semiconductor growth cycles and reported incidents of counterfeit parts, IHS pointed to awareness, risk mitigation, and contingency planning as keys to keeping the supply chain as secure as possible.
According to IHS, chip sales and component counterfeits expanded in tandem from 2001 to 2007, an expansion period in the semiconductor market. Counterfeits then plunged when global semiconductor revenue shrunk during the 2008-2009 recession. The market rebound in 2010 was accompanied by another spike in counterfeit parts. While semiconductor revenue grew 33% in 2010, reports of counterfeit parts surged 152%.
Revenue growth in semiconductors is expected to grow more than 4% this year, on its way to 9% growth in 2013, IHS reported this spring.
“The semiconductor industry is exhibiting the classic signs of the start of a new growth cycle, with tightening supplies, broad-based price increases, and a lengthening of lead times for the delivery of products,” said Rick Pierson, principal analyst for semiconductors at IHS. “These are prime conditions for suppliers of counterfeit parts, which are eager to fill supply gaps with their fake goods. For semiconductor purchasers, the rise in counterfeits represents a major risk, bringing downsides in terms of financial losses, damage to company reputations, and even safety concerns in some products.”
In addition to price increases, IHS predicted that demand will outstrip supply in the third and fourth quarters this year for many widely used components, including capacitors, NAND flash, dynamic random access memory (DRAM), power semiconductors, and logic chips. The conditions create a prime environment for counterfeiters.
“Counterfeiters have gotten more sophisticated,” Pierson said. “They watch the market and know where the weaknesses are. They know which products are in short supply and can generate profits. And they also know when market conditions are shifting in their favor.”
Reports of counterfeit parts also increased following last year’s tsunami in Japan and subsequent panic-buying in many markets. Since then, industry watchers are placing a renewed focus on supply chain planning and risk mitigation and recommending that end users get closer to their suppliers by buying directly from the manufacturer or their authorized distributors and placing more stringent requirements on independent or open-market distributors.
“To mitigate the counterfeit problem, electronics buyers must develop a plan to ensure continuity of supply. Such plans, similar to companies’ contingency preparations for disasters, require firms to update their listing of suppliers, parts/materials, life cycles, logistics, and internal operations. For every supplier, buyers must create and update the supply profile of that entity,” IHS said.
“Doing this is more important in times when counterfeit activity is on the rise. It’s also critical to identify which parts and markets are more susceptible to counterfeit activity,” IHS concluded.