Dan Niles: Strong Developed Markets, Weak Emerging

Yesterday was Dan Niles’s economic review that he presents quarterly for GSA. As always he starts from big macroeconomic picture and ends up looking at the implications for semiconductor end-markets and thus the implication for semiconductors in general and the fabless ecosystem in particular.

The big picture is that the developed markets such as US, Japan and some of Europe seem to be recovering reasonably well if not dramatically so. But with bond yields essentially zero, hot money has moved into the developing markets, the so-called BRICs (Brazil, Russia, India, China) and they are struggling. Brazil, India and Russia are all experiencing slowing GDP, high inflation and a falling currency. China is much stronger, but not as strong as it was. It has to rebalance its economy more towards domestic consumption, slow the growth of the shadow banking credit markets (now up to 15%). Hopefully they can avoid a Lehman type event, but there are lots of bad loans and malinvestments around. As the fed starts to “taper” and stop quantitative easing and, eventually, see interest rates increase, some of the hot money will return to the US from the developing countries which will make their problems worse. Japan also has an issue as interest rates rise since it debt is over 200% of GDP. Of course if the US did its accounting properly for future entitlements we are much worse.

The big semiconductor end markets are computing and mobile. Computing is showing some uptick finally, although that is after two years of fairly major decline. In computing, flat is the new normal. The only bright spot is the buildout of datacenters. The traditional desktop market is largely gone and a lot of the notebook market is being superseded by tablets (iPad and the like) or just smartphones. More internet access was made on mobile devices last year than traditional PCs.

Mobile will also slow, although it will still grow a lot, over 20%. But that is down from 40% and more in the last few years. But smartphone and tablet markets are starting to be mature, at least at the high end. Future growth will mostly be at the low end and a lot of that in China. There is now only one north american manufacturer in the top 10 (Apple at #2). Motorola, Palm and Blackberry used to be there. Samsung is #1. But Huawei, Lenovo, ZTE and probably Coolpad (Yulong), all from China, and LG from Korea are all there. Nokia (purchased by Microsoft) should just scrape into the top 10 for the year, Europe’s only entrant.

After growing 4% this year, mostly due to a doubling in memory prices, and basically being flat for several years, semiconductor should grow 6% this year. There has not been overspending in capital investment so this time there is not excess capacity.

TL;DR developed markets in good shape; BRICS not so much. Semi should break out and have a good year after 3 years of being flat

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