Semiconductor Sales Recovery Loses Steam

The semiconductor industry is looking like it will settle into modest but steady growth in 2010, a far cry better from the pain of much of last year, but it won't be the rocket ride that was hinted in the fourth quarter, either.

Supply chain market researcher iSuppli issued a report projecting the 2010 global semiconductor market to grow by 21.5 percent over 2009, which looks good, though 2009 was an awful year. The growth rate forecasted for 2010 is just 8 percent better than 2008 numbers and 2.3 percent better than 2007.

"Amid double-digit growth in revenue, rising prices, supply constraints and soaring capital equipment purchases, enthusiasm over the semiconductor industry's 2010 outlook has hit a fever pitch," iSuppli Senior Vice President Dale Ford said in a statement. "However, conditions in 2010 appear so fantastic only in comparison [to] 2009. In reality, 2010 is likely to simply be a year when semiconductor industry growth on a sequential quarterly basis returns to a more normal pattern."

Downturns in the semiconductor industry have historically have been driven by supply and demand dynamics in the technology market, Ford noted. In this instance, sales took a nosedive when companies ceased capital expenses amid the battered economy.

There had been hopes that the tremendous momentum of the third and fourth quarters of 2009 –- when sales greatly exceeded projections due to a huge build-up of products for the Windows 7 launch and Christmas season –- would continue into 2010. Vendors have been hoping for some time that a replacement cycle would begin, where companies would start to replace aging equipment with newer gear.

However, the economy is just not picking up steam. It remains stalled in the U.S., while Europe continues to have problems, highlighted by the woes Greece is experiencing. Asia has shown strength in various markets, but that resilience hasn't proved enough to offset the slump in the rest of the world.

The semiconductor industry is also seeing other challenges apart from the global economy. Parts have been constrained for some time now, particularly optical drives, mobile chips and LCD panels. Between high demand, shuttered facilities that had to be restarted and earthquakes plaguing the Pacific Rim, LCD panels have been hit particularly hard.

Because many manufacturers ceased production and shut down plants in 2009, when demand picked up they had a hard time getting things restarted. That has also caused some of the shortages in components, iSuppli noted.

Semiconductor suppliers have also been raising prices to recapture margins and maximize profits. Memory makers have just held their prices even with the prior year, which was a blessing for them after a period of suffering 50 percent price drops.

However, pricing trends have returned to historical norms in 2010. iSuppli's Procurement Pricing Index predicts average prices for electronic components, including most categories of semiconductors, will decline at about a 2 percent sequential rate in the first and second quarters of 2010. Such a rate of decline is a typical for the semiconductor industry and certainly doesn't reflect a surge in pricing.

Another positive sign for the global semiconductor industry is the resumption of capital spending among chipmakers on chip production equipment. Global spending on semiconductor manufacturing equipment is expected to rise by 46.8 percent in 2010 compared to last year, bringing an end to three consecutive years of decline.

Capital spending on fabrication plants is expected to rise 46.8 percent in 2010, but that will still be less than half of the expenditures in 2007 and 2008.

Andy Patrizio is a senior editor at InternetNews.com, the news service of Internet.com, the network for technology professionals.