Semiconductor Update

January 2006

Global semiconductor sales will grow at a compound annual rate of nearly 10 percent from 2005 through 2008, reaching $309 billion in that year, according to the annual forecast of the Semiconductor Industry Association (SIA). The forecast projects worldwide sales of microchips to reach $309 billion in 2008, an increase of 45 percent from the $213 billion record level of 2004.

The forecast calls for 2005 sales to increase by 6.8 percent to $227.6 billion, followed by increases of  7.9 percent to $245.5 billion in 2006, 10.5 percent to $271.3 billion in 2007, and 13.9 percent to $309.2 billion in 2008.

"While Information Technology products will continue to be the largest market sectors for semiconductors, consumer products will be the major growth-drivers in the years ahead," said SIA President George Scalise. He explained that advances in microchip technology enable a wide array of new products that have captured the imagination of consumers. He cited as examples, the rapid evolution of cell phones, MP3 players, digital televisions and personal computers.

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Japanese-based semiconductor production equipment manufacturers posted a book-to-bill ratio of 1.01 for October, up from 0.90 in September, according to the Semiconductor Equipment Association of Japan (SEAJ).

The three-month average of worldwide bookings in October was 122.2 billion yen ($1.03 billion). The bookings figure is 4.6 percent up on the final September 2005 level and up 9.4 percent from the like period a year ago.

The three-month average of worldwide billings in October was 125.5 billion yen ($1.05 billion). The billings figure is down 6 percent on the final September 2005 level and 1.5 percent down from the October 2004 billings level.

The Semiconductor Equipment and Materials International (SEMI) trade group disclosed that it has revised its chip-equipment book-to-bill ratio downwards for two months.

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Chinese contract chip maker Hua Hong Group plans to spend roughly $1.6 billion to build an advanced factory.

Hua Hong, based in Shanghai, intends to construct a factory, or fab that uses 300-millimeter silicon wafers for chip making, Reuters reported. The 300-mm fab would greatly boost the company's production volume and enable it to better compete with larger players in the foundry market.

Hua Hong's chip-making subsidiary and joint venture, Hua Hong NEC, will reach about $400 million in sales this year.

Currently, the only company in China with a 300-mm fab is Semiconductor Manufacturing International (SMIC), a Chinese foundry based in Shanghai. SMIC is China's largest foundry and the third-largest in the world. It generated $310 million in sales in the third quarter of this year alone.

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The India Semiconductor Association (ISA) is drawing up plans for a semiconductor fabrication complex it is calling "FabCity." The wafer fab facility is expected to cost between $3 billion and $4 billion.

The plans include discussion of subsidy and tax incentives and are being written without a particular location in mind to determine what steps are necessary to establish Indian semiconductor manufacturing and the possible rewards.

The ISA expects FabCity to have the potential to support more than $50 billion of global investment and create an electronic industry in excess of $100 billion in the next 10 years. "This vision is inspired by an unprecedented growth in the Indian electronics consumption, a vibrant chip design industry, increasing semiconductor content in the electronic industry and significant export potential," said Poornima Shenoy, president, ISA, Bangalore.

The blueprint is expected to be used by the Indian federal and regional governments. In addition the federal government is looking for a 1,500-acre site to accommodate FabCity and has said that it will invest in the setting up of the complex.

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Intel Corp. announced that it is setting up a $250-million venture capital fund to invest in technology companies in India. In addition, Intel chairman Craig Barrett said that Intel plans to invest an additional $800 million to expand its research and development activities in India over the next five years.

"We are still in discussion with the government on the possibility of manufacturing in India," Barrett said, according to the Associated Press.

Barrett reportedly said Intel has invested $700 million in its R&D center in Bangalore over the last ten years. The facility employs about 2,800 people, and will continue to expand.

The new venture capital fund will be used to invest in companies that can benefit from the rapid growth in the domestic IT market segment in India, and provide local businesses with capital to help nurture technologies and products developed for local use, Intel said. Examples of initial focus areas include cellular communications, broadband applications, and wireless technologies.

Intel Capital made its first investment in India in 1998 and since then has invested in more than 40 Indian companies. Several of these companies have since gone public or have been acquired.

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Microsoft said on December 7 that it would invest $1.7 billion in the country of India over the next four years.

"With more engineers graduating out of universities and colleges than anywhere else in the world, we can learn from the growing developer and engineering base," says Microsoft spokesman Matt Pilla. "India is emerging as a world-class IT leader, and is supported by an increasingly healthy market and economic outlook that offers tremendous growth opportunities for the company."

It's not like Microsoft hasn't invested in India already. The company first opened shop in the country in 1990. Eight years later, it opened a product-development center in Hyderabad, where most of its 3,000 India employees work. That's about 5 percent of Microsoft's 63,000 employees worldwide. And earlier this year, Microsoft opened a new research lab in Bangalore.

With the new round of investment, Microsoft plans to add 3,000 more employees, Microsoft Chairman Bill Gates told journalists in New Delhi. “We are keen to grow Microsoft activities in India,” Gates said, according to press reports. “The growth in employment for Microsoft will be more in India than the United States.”

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South Korean exports in the information technology industry recorded $7.24 billion in November, up 5.5 percent from a year ago, according to a report by the Ministry of Information and Communication.

The November performance marked the third consecutive month exports broke records. The previous highest was $7.13 billion in October, following $6.91 billion in September.

The report said imports of IT products, including semiconductors, mobile handsets and flat display panels, reached $4.04 billion in November, producing a trade surplus of $3.20 billion.

The surplus was largely attributed to a 5.8 percent year-on-year rise in semiconductor shipments to $2.55 billion in the month. Semiconductor exports to China reached $1.01 billion, a 53.1 percent increase from a year ago.

Another contributor was the mobile handset and parts sector, which saw a sharp 34.8 percent increase from a year earlier to $2.52 billion.

"The growth of November export volume resulted from a special seasonal demand in the month. The growth rate is expected to slow down next month," said the ministry. It forecast that Korea's yearly IT goods exports would reach $78 billion by the year's end.

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The integrated circuit (IC) dollar content per cellular phone is expected to increase from $38.54 in 2005 to $44.73 in 2009, according to the latest IC Insights semiconductor market forecast. As a result, the IC content percentage of the total handset price is forecast to rise from 28 percent in 2004 to 37 percent in 2009. IC Insights further believes that replacement handsets will tend to be "full-featured" and relatively expensive, and that the market for ultra-low-cost cellular phones will be rather limited.

In 2009, 80 percent of cellular phone unit sales are forecast to be replacement sales.

With full-featured/Smartphone handsets becoming more prevalent, IC Insights believes that the IC value in a cell phone will decline slightly in 2009, coinciding with the forecasted overall IC cycle slowdown and an associated fall in IC average selling prices (ASPs) that year.

Increased IC integration, intense competition among IC producers, and a relatively slow overall IC market (accompanied by lower IC ASPs) drove down the IC dollar value per handset to a low of $31 in 2002. However, higher levels of IC integration have also served to incorporate some of the handset functions typically performed by passives and discrete devices. This movement from passive and discrete devices to ICs, coupled with handset price declines, is forecast to help boost the IC percentage content of a handset through 2009.

The average IC value in a cellular phone is expected to be over $38 in 2005. However, there is almost a 3:1 difference in IC content in a high-end cellular phone (including a camera) as compared to a “basic” model. The use of a camera chip, Bluetooth module, and multimedia processor in a 2.5G-phone means more than four times the memory device cost. Also, many high-end phones require significantly more DRAM in addition to flash memory.

Throughout 2005, many handset vendors were researching the possibility of producing ultra-low-end phones that would sell for under $40 and have a bill-of-materials cost of about $25. The bill-of-materials cost for a low-end handset in 2005 was about $39. Many handset producers believe that a $25 cost, or lower, will be reached sometime in 2006, allowing them to offer ultra-low-cost phones to emerging markets such as India, Africa, and China.

IC Insights believes that the market for ultra-low-cost cellular phones will be rather limited. Considering that 80 percent of the cellular handset market in 2009 is forecast to be higher-end replacement phones, and that many new subscribers will prefer more full-featured phones, the market for ultra-low-cost phones is expected to represent only 5-10 percent of the handset units shipped over the next five years. As one handset manufacturer stated, “forget the $25 phone, give me a $5 per month service fee from the phone company!”

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Gartner says, "Worldwide Semiconductor Capital Equipment Market to Return to Positive Growth in 2006."
 
While demand for capital equipment in 2005 softened, creating a decline in overall spending, the worldwide semiconductor capital equipment market is poised to grow 8.4 percent in 2006, with spending totaling $36.4 billion, according to Gartner, Inc.

In 2005, capital equipment spending declined 10.6 percent, as orders weakened in the first half of the year. However, by the second half of the year, the market experienced a turnabout in orders, especially in the back-end segments.

"The industry has managed to respond well to inventory fluctuations, slightly excessive capacity levels, and rapidly changing market parameters," said Klaus Rinnen, managing vice president for Gartner's semiconductor manufacturing and design research group. "The industry appears to have a reasonable balance between production levels and capacity and end-user demand."

"Looking further ahead, spending will rise in the first half of 2006, but spending should flatten in the second half of the year before starting a sustainable recovery into 2008," Mr. Rinnen said.

Worldwide wafer fab equipment spending is forecast to grow 3.3 percent in 2006, after declining 8.8 percent in 2005. Worldwide semiconductor wafer fab utilization rates in 2005 remained in a fairly narrow range of between 85 percent and 90 percent, and Gartner analysts expect this to continue, albeit on a slightly upward trend, through 2007 when total utilization rates will break into the 90 percent range.

"We expect to see capacity and wafer fab equipment market growth dictated by increased device demand, and the increasingly costly transitions to new technology nodes," Mr. Rinnen said. "With equipment costs increasing an estimated 10 percent for each new technology node, manufacturers will manage investments in new technology very carefully."

The packaging and assembly (P&A) equipment market will decline 11.1 percent in 2005, which is slightly better than Gartner's previous forecast in October for a14.9 percent decline. The first half of 2005 was relatively slow, paralleling the slowness in the overall packaging/assembly market. More positive conditions developed late in the second quarter as industry utilization rates began to tighten and move back near the 85 percent mark.

For the first half of 2005, revenue dropped significantly for many key automated test equipment (ATE) providers. However, ATE spending picked up in the second half of the year. "The current increase in ATE sales is primarily being driven by increasing capacity requirements for memory and SOC testers," Mr. Rinnen said. "Expanding demand for these semiconductor devices, coupled with the trend toward further outsourcing of test to SATS companies, is sparking the latest ATE market growth cycle."

Additional information is available in the Gartner report "Semiconductor Capital Equipment Demand to Rise in 2006."

This research is produced by Gartner Dataquest's Semiconductors Manufacturing and Design program. This research program, which is part of the overall semiconductor research group, provides a comprehensive view of the entire semiconductor industry, from manufacturing and design to device and application market trends. More information on Gartner's semiconductor research can be found in the Gartner Semiconductor Focus Area.