Semi firms resort to fisticuffs when the chips are down

A RELENTLESS PRICE war between big players in the semiconductor industry is like little children throwing their toys out of their prams, said Future Horizon's principal analyst Malcolm Penn today,

But no one said the semiconductor industry was rational, and the vexed matter of average selling prices (ASPs) is blurring the picture which is one of healthy demand.

Said Penn: "Semiconductor forecasting is not an exact science. Even the most professional companies in the world resort to fisticuffs when the chips are down. No one said this industry was rational. Last year I got caught on ASPs."

Future Horizons forecast last year a 20 per cent growth in the industry and, said Penn, it would have been that if it wasn't for the pesky ASPs.

He said: "The problem with 2006 was a price not a demand problem. Unit demand turned out ot be 18 per cent. The memory and the microprocessor price war are still going on. Price wars just destroy the bottom line."

Penn reckons that average growth this year will be around nine per cent. Some analysts are unduly pessimistic at growth figures of five per cent, while Future Horizons itself thinks growth will be at 12 per cent.

The world has changed, said Penn. "We used to think of the world as being US, Japan and Western Europe with half a billion middle class people." But, he said, another three billion have about 70 per cent purchasing power which is a significant factor.

India and China are driving real demand for semiconductors, he said. While Chinese demand is somewhat warped by the government, the demand is real, said Penn.

The semi industry has tamed the fab capacity beast. The industry has micro managed investment and that's new for the industry. Capacity for quarters one to three this year are already decided. There's always a two-quarter delay to bring capacity online. There's probably a year delay between a customer ordering something and becoming unit ships.

Transistor prices decrease 30 per cent per year but ASPs do not, said Penn. Chips are also getting expensive to design with the cost soaring. There are infintely high design costs designing ICs which you sell for nothing. This trend, said Penn, cannot continue forever. There's no real correlation between unit and value growth rate trends. ASP and price are not the same thing. ASPs stopped falling at the end of 2006. Since then, they've been increasing again. µ