APAC to Account for 55% of Global Semi Sales in 2011

The Asia-Pacific region will make up 55 percent of semiconductor sales by the end of 2011, according to S&P Equity Research semiconductor and semiconductor equipment analysts Clyde Montevirgen and Angelo Zino. The analysts expects more semiconductor companies trying to make cost structures more variable by outsourcing manufacturing to third-party foundries.

Leading Taiwanese foundries, such as Taiwan Semiconductor Manufacturing Co. Ltd (TSMC), which have invested heavily in sub-40nm manufacturing processes, could attract chip companies that do not have the capital to invest in such high-end manufacturing technology. Also assuming softer sales growth and less favorable tax incentives in Europe, as austerity measures continue, Asia is expected to continue to gain global share.

"The year 2010 is expected to close strong for the semiconductor and semiconductor equipment industries, as sales growth for both are forecasted to reach decade highs," said Montevirgen. "Consequently, we anticipate that most chip and equipment companies will experience multi-year high margins and exceptional earnings increases."

"While we think there is still some room to grow, we project more modest advances ahead," added Zino.

Below is list of the two analysts' other forecasts for these industries for 2011.
1. Semiconductor industry sales will rise 7 percent in 2011. Increasing unit shipments for key end-markets, such as computers, smartphones, and communications, will account for a large percentage of the semiconductor industry's demand. Industry sales will rise to nearly $320 billion in 2011 from an anticipated $299 billion in 2010.

2. For 2011, semiconductor equipment sales growth should slow; sales will rise less than 10 percent, after projected two-fold revenue growth for 2010.

3. Capacity purchases will be driven by flash memory manufacturers, such as Toshiba and Samsung. Robust unit shipments for smartphones and tablets will be a major catalyst for these manufacturers, which should keep customer profitability at high levels. Unlike Dynamic Random Access Memory (DRAM), which relies heavily on PC demand, the flash memory market depends on a number of different applications, putting it in a better shape than DRAM on a comparative basis. The flash memory industry has emerging technologies, such as solid-state drives (SSDs), which should drive new demand.

4. DRAM segment sales are expected to decline in 2011, after the projected doubling in capital spending in 2010. The biggest growth catalyst for the DRAM segment in 2010 has been the transition from DDR2 (double data rate) technology to DDR3 (both DDR2 and DDR3 are types of DRAM chips that are found in personal computers). DDR3 technology is the successor to DDR2 and offers advantages such as lower operating temperatures, greater speed, and reduced power consumption.

5. The semiconductor industry's plant utilization rate are forecast to be around 90 percent by the end of 2011. Capacity utilization rate will fall from the current mid-90 percent range to the mid-to-high 80 percent range early in 2011, as chipmakers allow excessive inventory in the supply chain to digest. Seasonal strength and a rebound in end-market demand in the second half will help keep plants busy through the fourth quarter of 2011.

6. The semiconductor industry's gross margin will widen modestly throughout 2011. First-quarter gross margins are expected to be in the low-50 percent range, given lower plant utilization rates. However, orders will return to more seasonal patterns starting in the second quarter, and margins will expand to the mid-50 percent area by the end of the year.

7. Semiconductor equipment manufacturers will be moving further into higher-growth, adjacent industries, namely solar, given that the semi conductor equipment industry is in the midst of a long-term secular decline.

8. The semiconductor equipment back-end industry (packaging and automatic test equipment) will experience pressure to consolidate, given the segment's lower growth rates, high fixed costs, and lower profitability relative to other areas of the supply chain.

Standard & Poor's Equity Research Services