Global Semiconductor Industry will continue its slow growth in 2012

Global Semiconductor Industry saw tremendous growth in 2010 post the global financial crisis as major semiconductor companies invested in manufacturing facilities to meet the raising demand from consumers fueled by sales of tablets, personal computers, datacenter server demand and mobile phones particularly smart phones. But the growth stalled in 2011 due to the volatile macro economic environment particularly the European Debt Crisis and the US economic slowdown, subsequent effect on other countries particularly nations like India, China, etc that saw slowdown in economic growth, natural disasters like the Japan Earthquake and Tsunami, Thailand Flooding too played their part but the global semiconductor industry survived these adverse conditions and grew modestly in single digit. The industry went through bad patch in 2009 due to the Global financial crisis where the YoY growth declined by 20% but it recovered in 2010 with a remarkable double digit more than 20-30% growth but due to the above mentioned adverse conditions growth was modest between 2-4% in 2011. But with the growing consumer demand for tablets, e-readers, personal computers like laptops, ultra books, smartphones, datacenters and cloud computing, etc the Global Semiconductor Industry is expected to reach approximately $412.8 billion in 2016 according to IHS iSuppli Global Manufacturing Market Tracker report. Global semiconductor revenue will reach $324.6 billion with 4.37% YoY growth in 2012 where as industry grew by only 1% in 2011 according to IHS.

Source: IHS iSuppli Research, April 2012

According to IDC, Worldwide semiconductor revenues increased more than 3.7% YoY to $301 billion in 2011, compared to more than 24% YoY growth to $282 billion in 2010. IDC expects 2012 semiconductor revenue growth to be in the 6-7% range fueled by accelerated growth in second half of 2012 when fab utilization rates rise and semiconductor cycle that started in mid 2011 will bottom out by second half. Gartner forecasts worldwide semiconductor revenue to total $316 billion in 2012, a 4% increase from 2011 level of $306.8 billion, up $5.4 billion, or 1.8% from 2010 level of $301.4 billion. Gartner is expecting a rebound starting in the second quarter of 2012, supported by inventory corrections, bottoming foundry utilization rates and global economy stabilizing. According to both IDC and Gartner, Intel is the market leader with close to $51 billion in revenues; Samsung is number 2 with $27 billion revenues (Gartner) and $29 billion revenues (IDC).According IDC Texas Instruments is third followed by Toshiba and Renesas Electronics but according to Gartner Toshiba is number three followed by Texas Instruments and Renesas. Also similar difference is there for number seven and eight positions according to IDC Hynix is seven and STMicro eight but Gartner classifies STMicro is seven and Hynix is eight.

Microprocessors performed well in 2011 after not doing so well in 2010 and are expected to continue to do well in 2012 with high average selling price and strong demand for Intel chips for use in Personal computers like notebooks & ultra books and servers. NAND flash memory revenues are expected to grow in 2012 just the way they grew in 2011 fueled by strong increase in mobile consumer devices and solid-state drives. DRAM pricing fell by 50% has affected the overall industry revenues in 2011due to falling ASPs and oversupply as it poorly performed where in the revenues fell by 25%. But DRAM will see slight recovery in 2012 as one of the major player Elpida filed for bankruptcy. Inventory is a major concern for the industry and according to IHS despite the semiconductor suppliers reducing their inventory by 7.5% over the last 6 months, total inventory remains at high levels both in terms of aggregate dollar value as well as in days of inventory but further reductions at least another 5%, expected through H1 2012, are necessary for chip makers to experience sustained demand and growth.

Gartner forecasts semiconductor revenue from media tablets will reach $9.5 billion as unit production is expected to increase by 78% YoY, semiconductor revenue from PCs will reach $57.8 billion as unit production expected to increase 4.7% and semiconductor revenue for mobile phones will reach $57.2 billion as production is expected to grow 6.7% in 2012. Consumer demand from Asia Pacific and Americas is expected to rise further but demand in Japan and Europe is expected to be seeing negative growth. The semiconductor industry is also seeing consolidation as larger players have significant cash reserves and looking to acquire smaller players as companies in the industry is positioning themselves for the next phase of growth with devices becoming more intelligent and needing support for high-level operating systems, connectivity, and application processing capabilities, according to IDC. A number of mergers and acquisitions came to fruition in 2011, most notably Qualcomm–Atheros, Texas Instruments–National Semiconductor, SMSC–Conexant, Broadcom–NetLogic, CSR–Zoran, and Microsemi–Zarlink and this trend is expected to continue in 2012 according to IDC. Ultimately the growth of the global semiconductor industry is dependent on macroeconomic environment stabilizing and improving with containment of European Debt crisis and growth returning back to emerging countries like India, China, etc that drive demand for PCs, tablets like iPads and e-readers, Smartphones like iPhones, no major natural disasters, and manufacturers of PCs like notebooks, ultra books, servers, mobile phones, etc launch new models and attract more consumers. Most of the research firms and semiconductor companies expect that growth will return by second half of 2012.

Natural Disaster Risk to Business Case Study – Thailand Flooding Hard Disk Drive Shortages Ripple effect on Personal Computer & Chip Vendors

Thailand have been affected by seasonal flash flooding during the monsoon season due to tropical savanna climate and flooding which began in July 2011, still continuing in December but receding slowly has been the worst in 50 years. World Bank ranks it as the fourth costliest disaster as of 2011 surpassed only by the 2011 earthquake and tsunami in Japan, 1995 Kobe earthquake, Hurricane Katrina in 2005. According to Thai Meteorological Department, the rainfall amount of Thailand since 1 January to 31 October was 1822.4 millimeters, about 28 % above normal and the October rainfall was 201.8 millimeters, 10 % above normal. Seasonal rainfall from May to October in 2011 was above normal of 20 – 60% for most Meteorological Station in northern part and of 10 - 40% with below normal in some areas in central part.

Thailand is the world's second-largest producer of HDDs and accounts for 45 % of worldwide hard-drive production, after China and is a major supplier of hard drive parts too. Thailand produces 2.5inch drives that are key components in notebooks and pc. More than 25% of the world’s HDD assembly facilities are located in Thailand’s flooded areas. Seagate, Western Digital and Toshiba are the major manufacturers for HDD and have extensive production facilities in Thailand that are affected. Seagate facilities are not submerged but the component suppliers and Western Digital factories are submerged in water still. Nidec supplies more than 70 percent of all global HDD motors, to major manufacturers. Thailand faces significant competition from Singapore, Malaysia, the Philippines and China and American and Japanese companies dominate sales of HDD, over 65 percent of product final assembly is achieved in Southeast Asia.

Flooding Risk always existed

Despite knowing the fact that Thailand is prone to severe flooding during the monsoon season and it’s after affects, HDD manufacturers built fabs and assemblies in Thailand. Dependency on Thailand for supply and concentration of manufacturing facilities and component manufacturers for HDDs there have not only affected the manufactures but also the OEMs and chip makers that supply chips to OEMs for their personal computers. There have been more than 50 instances of major flooding in Thailand in past 100 years and still HDD manufacturing including the component suppliers built facilities in Thailand. So what made everybody overlook this risk? Thailand had been an inexpensive destination for HDD manufacturers with relatively experienced labor pool, export oriented tariff and tax incentives by Thai Government along with geographical proximity to Singapore, where component parts are brought for final assembly. Businesses have overlooked the natural disaster risk in picking Thailand as the favored destination and this has affected the whole hardware industry particularly the PC and Storage devices.

Impact on HDD Supply

According to IHS iSuppli, the Thai floods will cause a 3.8 million shortfall in PC shipments in first quarter (JFM) of 2012; worldwide PC will amount to 84.2 million units compared to 88 million units predicted earlier, hurting forecasts throughout the year. Total PC unit shipments in 2012 are forecast to amount to 376 million (6.8% YoY), lesser than the previous prediction of 399 million (9.5% YoY) both due to the HDD shortage and weakening demand due to other factors. PC shipments are expected to decline in the first quarter compared to the peak holiday-selling season in the fourth quarter; the drop in 2012 will be far sharper by 11.6% than the 6% historical average decline. Supplies will start to improve in the first quarter, and production would fully rebound by the third quarter of next year, as manufacturers recover or shift production to other locations.

According to DigiTimes, most hard drive manufacturers expect to ship significantly less hard drives in Q4 compared to Q3 like Western Digital 4Q11: 22-26 million (3Q11: 58 million), Hitachi 4Q11: 20 million (3Q11: 32 million) and Toshiba 4Q11: 12 million (3Q11: 22 million). According to IDC, fourth quarter's hard drive shipments will fall about 30% below demand and industry will ship about 120 million units, and demand was 175 million units and the impact will be felt into 2013. Gartner expects a shortfall in supply as demand is for 180 million HDD units for the fourth quarter but only 130 million units will be available, that increases the cost per unit.

Major suppliers in Thailand

Western Digital is the worst affected in the flooding has reported that production of hard drives finally resumed in first week of December  in one of its buildings in Bang Pa-in (BPI), Thailand. All Western Digital's hard drive and component manufacturing facilities in Thailand had been shut down since the week of October 10. Company expects its hard drive shipments during the December quarter will be 22-26 million units. Western Digital expects to resume head slider production in the March 2012 quarter (Q3 FY'12) and also begin production in a new WD slider fab location in Penang, Malaysia, at the same time. 

Seagate appears to be the go-to hard-drive manufacturer amid tight supply as its facilities were largely unscathed, but its “ability to manufacture hard-disk drives has been impacted due to external component supply constraints. Seagate said that it will ship about 43 million units in the December quarter and expects that hard-drive supplies will be “significantly constrained for several quarters. Samsung, Hitachi Global Storage Technologies and Toshiba are also affected by Thai floods. Samsung is more affected in PC business and a reduced demand for dynamic random access memory (DRAM). Toshiba Corp suspended the planned sale of a unit in Malaysia to Amkor Technology Inc due to the impact of flooding in Thailand and is shifting production to Malaysia unit from Thailand.

Most hard drives have upwards of 200 individual components that go into them and many of them produced by individual suppliers in the flooded region. Nidec Corp supplier of hard disk drive (HDD) motors and other components and commenced alternative production of HDD motors at a leased factory in Rayong Province located outside the flooded areas, which is intended to temporarily substitute for the company’s currently inactive Bangkadi Factory. Suspension arm maker Hutchinson Technology still has $50 million worth of specialty manufacturing equipment bolted to their now-submerged factory floor.

Impact on Notebook, PC & Chip Makers
Intel said it expects fourth-quarter sales to come in between $13.4 billion and $14 billion, significantly lower than its previous estimate of $14.2 billion to $15.2 billion due to worldwide hard drive shortage and PC makers are seeing fall in inventories of desktops and laptops, because required quantity of hard drives are not available to put in their computers. As the PC makers reduce their PC stockpiles, they're scaling back their semiconductor purchases from Intel. The company expects hard drive supply shortages will continue into the first quarter of 2012 and PC makers will buy up microprocessors as hard drive supplies recover in the first half of next year.

Lenovo email states that the drives are unavailable for some ThinkPad laptops include 750GB 5,200-rpm models and those with configurations of 320GB 5,400-rpm, 250GB 7,200-rpm and 160GB 7,200-rpm and will have to settle for "off-spec" drives.Lenovo said it will swap unavailable drives for another product the industry can still provide, such as a 5,400-rpm model. Even then, customers will have to wait an additional 45 to 60 days for those drives to become available. AppleInsider first reported on the shipping delay, noting it seems to only affect iMac models with a 2TB hard drive added on to them. Shortage in hard drive pushes the shipping time of the computer out by 5-7 weeks as opposed to the few days that the build to order iMacs usually take to ship.

Dell warned that hard drive shortages could dent its profits as it uses just-in-time manufacturing system so only keeps a small supply of components on hand to reduce warehousing costs. Full-year sales will probably be below expectations due to the hard disk drive shortage and weak economy and the company is trending to the lower end of the range of its revenue outlook of 1% to 5% full fiscal-year growth.Samsung and Acer have said that PC supplies will be lowered due to shortage of HDDs and subsequently prices will rise. Drive prices have increased 20% since the flooding started and Acer have to increase PC prices to cover the higher costs for disk drives. Acer said Q4 sales will be 5-10% lower than Q3 as a result of the floods as compared to flat sales. Samsung says Q4 PC sales will be below previous forecasts, and as a result will pressure prices for DRAMs.

HP anticipated serious impact to November and December forecasted supply as most HDD manufacturers are committing to 50% supply only. As a result HP is expecting severe shortages affecting Desktop, Workstations and Notebook supply and is working very closely with HDD Suppliers to secure priority allocation and lessen the impact on its customers. HP hope to absorb costs related to HDD price increases for as long as possible. HP expects a surge in demand for SSDs and has secured supply of an additional 500,000 SSD drives to help with the expected shortage.

Why supply shortages are continuing?

Thailand produces all the key components for the HDDs and is assembled finally in Singapore and Malaysia. Nidec makes the motors used in 70 to 80 percent of the world's hard drives. Hutchinson supplies hard drive harnesses for a number of manufacturers; TDK makes suspension assemblies, MMI makes electrical components, and Furukawa makes everything from wire and heat sinks to drive platters. All these component manufacturers have exclusive manufacturing facilities in the flooding area and until these component manufacturers revive their production the final assembly units will do nothing. The fabs cannot be shifted easily and relocated to other geographies as the equipment is very costly and takes time to set up newly. It is also not possible to start manufacturing as soon as the flood waters recede as the extent of damage has to be assessed, repair and maintenance are going to take time, involves huge costs and the facilities may remain offline for some time. Seeing the level shortages and the announcements from PC makers the supply shortages cannot be covered by manufacturing from other geographical locations as the major component suppliers are in Thailand and their facilities are still under water. Installing new capacity at new location is not only time consuming but also waste as the new facilities will lead to oversupply as soon as the existing facilities revive their production and the technology is constantly changing.

As the PC makers and other OEMs have to wait for the Thailand flooding to recede and HDD manufacturers and component suppliers can only start operations in the first quarter of 2012, the prices are rising very sharply which is also increasing the cost of PCs. The shortages are also affecting the delivery of the products and most of the PC makers informing customers regarding the delays in delivery and are asking to settle for available lower level off spec drives. Some of the PC makers are hoping customers may even shift to Solid State Drives that are costly. Customers on their end are looking to extend the life of their PCs by using software that clean and defraggler software. Due to the euro zone debt crisis and US economic slowdown the businesses are facing tighter budgets and cannot afford to have rising prices of PCs and storage devices. PC makers and OEMs are hoping the shortages will not be severe as the demand will also be affected by the other factors like euro debt crisis and US economic slowdown.

Hard disk drive supply shortages in the wake of Thailand flooding will continue to affect consumers, computer system manufacturers and corporate IT shops into 2013, according to market research firm IDC. Seagate says that demand is estimated to significantly exceed supply during this time and expects that some companies will optimize unit shipments by manufacturing lower-component-count/lower-capacity hard-disk drives; thereby, only modestly offsetting the growing petabyte shortage. HDD manufacturers, PC makers and OEMs have realized that the only option they have is to wait for the waters to recede and restart the manufacturing as soon as possible and they don’t have any other way to overcome the Thailand HDD shortfall. All the PC makers and OEMs have started informing clients about the inherent delays and prices will rise as the shortages are expected to continue and affect the whole of 2012 and some are even predicting that situation will improve only in 2013. Some manufacturers like Western Digital and Seagate are sounding positive and hope to recover the production fast but they still say there will still be supply shortage in the first half of year and will improve in second half.

Discussion Points:

1. How natural disasters affect the businesses and what businesses have to do overcome such risks?
2. What options do the HDD manufacturers, component suppliers and PC makers have in the present scenario?
3. How to handle the supply shortages scenario and what should be the Customer Relationship Management strategy? ( Manufacturers, Component Suppliers and PC Makers & Consumers)