In last 3 decades of semiconductor market, the largest growth in IC sales was at 33% in 2010. At that time global recession had started due to financial crisis and in 2009 oil prices fell more than 30%. It appeared that oil prices were negatively correlated with semiconductor market growth. Today again there is another sharp decline in oil prices, but the growth in IC sales is not expected to rise significantly. The reason is that there are several other factors that can affect the semiconductor market negatively.
From economic standpoint it is understandable how commodities (and finished products) produced, exported, and imported by different countries impact the GDP of the respective countries and the world in general. Impact of low oil prices can be different for different countries. Let’s analyze the GDP data of countries which are dominant in electronics and oil production.
It’s important to recognize the importance of a country’s share in world GDP in determining how it can influence the direction of certain things in the world economy. USA has highest share in world GDP. In 2014, USA’s share was 22% in world GDP followed by China at 12.4%, and Japan at 8%; Eurozone’s combined share was at 16%. In 2015, the rank remained same; USA followed by China, Japan, Germany, U.K., France, India,… The oil rich countries other than USA (Russia, Nigeria, Middle East, …) represented between 0.5 – 3% each in world GDP; Russia’s share was maximum at 2.8%.
Clearly USA, China, Japan, and Eurozone have high contribution of electronics in their GDP. Russia, Nigeria, and Middle East derive their GDP from oil; contribution of electronics is negligible in their GDP. Now that explains how the world GDP had also increased by 4% in 2010, along with semiconductor market growth at 33%; semiconductor is key ingredient for electronics. About 25% of electronic systems content comes from semiconductors.
Let’s analyze this chart from an IC Insights report that represents electronic industry interdependence between 2014 – 2016.
The semiconductor market is expected to grow by 4% in 2016, after a decline of 1% in 2015. The semiconductor market has a positive correlation with electronic systems which is also expected to grow by 2% in 2016 after a decline of 2% in 2015. In 2016, a decline of 1% in semiconductor capex and 4% increase in semiconductor materials market is also explainable.
Coming to the explanation of why we cannot see an even higher growth in semiconductor market in 2016 – there are several factors. The world GDP is expected to grow by 2.7%, just above the recession threshold of 2.5%. Why is it so? There are other pain points – recession in metals and mining; there is oversupply and less demand of metals in the world. Construction activities have also slowed down and there is overcapacity of cement. These factors affect overall GDP.
China, the second in world GDP produces half of world’s steel which is in surplus now. China’s GDP growth is significantly down, weakest in last seven years, pegged at 6.3% in 2016. China being the lead in consumer electronics market (including PCs, smartphones, TVs, and so on), its lower GDP growth definitely affects semiconductor growth.
Also Japan, the third in world GDP is in recession, actually it is going into deflation. Eurozone doesn’t show any rosy picture either. However, the top ranked countries in world GDP drive significant electronic market. So, that has a positive impact on semiconductors compared to other negative impacts of GDP.
The top GDP contributor, USA is expected to grow its GDP at 2.5% in 2016. However, with 22% of worldwide GDP, USA definitely provides a very positive impact on semiconductors and that has a positive correlation with falling oil prices.
Within semiconductors, after massive consolidation in 2015, new manufacturers are not expected to enter the market in near future. Also capital expenditure will be lower baring flash memory segment, according to IC Insights report.
However, semiconductor R&D spending remains modest with overall 1% increase in 2015 reaching $56.4 B; Intel spent the highest ($12.1 B, i.e. 24% of sales) and TSMC, the 5[SUP]th[/SUP] among top R&D spenders increased its R&D spend by 10%, the most among semiconductor leaders. The pure-play foundries will keep up the innovation and keep providing thrust to IC manufacturing.
Considering the positive factors on semiconductors and all the other negative factors impacting the world GDP, 4% increase in worldwide semiconductor market in 2016 appears to be very good.
The IC Insights reports on 2016 IC Market and semiconductor R&D spend in 2015 can be referred here and here. Also read: 30+ Years of Semiconductors – The base matters!
Pawan Kumar Fangaria
Founder & President at www.fangarias.com
Next Generation of Systems Design at Siemens