Two weeks into the new year, Gartner Inc. has doubled its 2018 semiconductor revenue forecast to 7.5 percent, propelling the global chip market to $451 billion. This might only be a preview of what’s in store for the components industry as other devices, such as interconnect, passive and electromechanical components, are “pulled” through the supply chain by chip sales.
Gartner increased its semiconductor forecast in part because of rising memory ASPs. "Price increases for both DRAM and NAND flash memory are raising the outlook for the overall semiconductor market,” said Ben Lee, principal research analyst at Gartner, in a release. "Favorable market conditions for memory sectors that gained momentum in the second half of 2016 prevailed through 2017 and look set to continue in 2018, providing a significant boost to semiconductor revenue.” Gartner increased its 2018 outlook by $23.6 billion compared with the previous forecast, of which the memory market accounts for $19.5 billion.
However, system vendors in the smartphone, PC and server markets may face margin pressure as component prices increase. Gartner predicts that component shortages, a rising bill of materials (BOM) and the resulting prospect of having to raise average selling prices (ASPs) will create a volatile market through 2018.
Volatility often impacts buying patterns, and the supply chain is keeping a close eye on demand. Electronics distributors -- which serve a wide swath of end markets -- report demand is up across the board. "It's not just consumer," said Michael Knight, senior vice president, Americas, for specialty distributor TTI Inc. "It's all markets -- defense, aerospace -- and the electronics content in cars." Although component manufacturers are adding capacity in 2018, Knight doesn't think it will be enough. "In most cases it's incremental capacity and it's coming on slower than expected."
EMS provider Jabil reported in December that most suppliers are extending lead times and dealing with capacity constraints at their back-end facilities. Their book-to-bill ratios are higher than 1.00, Jabil said, indicating sustained growth. Capacity utilization for the overall semiconductor industry is at about 90 percent — an extremely high level.
Suppliers' reluctance to add capacity is understandable given the wild swings of past boom-bust cycles, Knight said. "Everyone is pretty distrustful of forecasts because we had some rough years," Knight said. "We are all super-sensitive to the cliff that follows upmarkets." However, signs continue to point toward an expanding electronics market, although some double-ordering has been reported in the channel. "We've been pretty careful managing our inventory and looking at customers' prior-year usage," Knight said. "We believe we're seeing real underlying demand."
Despite the upward revision for 2018, Gartner expects the quarterly growth profile for 2018 to fall back to a more normal pattern with a mid-single-digit sequential decline in the first quarter of the year. There will be a recovery and buildup in both the second and third quarters of 2018, and a slight decline in the fourth quarter.
Gartner notes there are a number of factors at play. A security vulnerability that spans all microprocessor vendors may increase short-term demand. "The current mitigation solution is via firmware and software updates, and has a potential processor performance impact," said Alan Priestly, research director at Gartner. "This may result in an increased demand for high-performance data center processors in the short term, but Gartner expects that in the longer term, microprocessor architectures will be redesigned, reducing the performance impact of the software mitigations and limiting the long-term forecast impact."
Taking the memory sectors out of the equation, Gartner forecasts the semiconductor market to grow 4.6 percent in 2018 (compared with 9.4 percent in 2017) with field-programmable gate array (FPGA), optoelectronics, application-specific integrated circuits (ASICs) and nonoptical sensors leading the semiconductor device categories. Additionally, application-specific standard products (ASSPs) will drive the forecast higher with an improved outlook for graphics cards used in gaming PCs and high-performance computing applications.
Gartner's one caution for 2018 is the volatility of memory demand. "The mixed fortunes of semiconductor vendors in recent years serves as a reminder of the fickleness of the memory market," said Gartner's Lee. "After growing by 22.2 percent in 2017, worldwide semiconductor revenue will revert back to single-figure growth in 2018 before a correction in the memory market results in revenue declining slightly in 2019."