by 
Morry Marshall, Semico Research
“Winter is Coming” is a saying in The North, one of the seven Kingdoms in Westeros, the fantasy kingdom in Game of Thrones. It is a reminder and a warning. Westeros is subject to climate cycles. During the cold portion of the cycle, a bitter cold winter arrives, especially devastating in The North. “Winter is Coming” is a warning to be prepared, to have enough food and other necessities stored to survive through the cold, which can last for several years.
Many things besides the climate in Westeros are cyclical. Semiconductor sales, semiconductor memory ASPs, the U.S. economy, and the stock market are highly cyclical and may be nearing the end of the current upturn.
- Since 1965, the average span between semiconductor sales growth peaks has been 4.4 years, and the longest span between peaks was 6 years. Downturns follow peaks. It has now been 8 years since the last semiconductor sales growth peak.
- DRAM ASPs are now more than double what they were in 2016. NAND Flash ASPs are more than one-and-one-half times what they were in 2016. Indications are that these ASPs are at unsustainable crest.
- The U.S. economy has been expanding since June 2009. If the expansion continues past June 2019, this will be the longest period of expansion in recent U.S. history.
- The U.S. stock market has been a bull market since March 2009, already the longest bull market in history.
The present semiconductor sales cycle has been atypical. After a downturn, semiconductor sales usually make a sharp recovery. A graph of annual semiconductor sales usually looks like a classical sine wave. That has not been the case since 2010. After a high in 2010, with annual growth of 33.7 percent, sales turned down in 2011. Then, sales growth dithered along until 2017, with growth of less than 10 percent in every year. Three years even experienced negative sales growth. In 2017, annual sales growth shot up to 21.6 percent, and the first half of 2018 was 20.1 percent. But, these increases have been primarily due to increases in memory ASPs, a sugar high.
DRAM and Flash memory normally account for about 20 percent of total semiconductor sales; but, due to the increases in ASP, they were 29.1 percent of total semiconductor sales in 2017 and 33.2 percent of total semiconductor sales in the first half of 2018. Since 2016, nearly 2/3 of the growth in total semiconductor sales has been due to an increase in DRAM and Flash memory sales, driven by increases in ASPs. This cannot last.
OEMs budget for the memory content in the devices they manufacture. They install the amount of memory that the budget will pay for. As memory densities increase, and prices rise accordingly; OEMs simply use fewer of the higher density memories, staying within their budget. As prices for a given density decline, OEMs install more memory, still staying within their budget. This works well in normal times. But, a 1 ½ or 2 ½ times increase in ASP with no increase in densities is not normal times. The PC and smartphone markets are now mature markets. Manufacturers in those markets cannot afford memory price increases. The server market is growing. Manufacturers there can absorb price increases, for now, but they will also soon face pressure to reduce costs. They will pass that pressure along to memory suppliers.
Indications are that the increase in memory ASPs has been due to capacity limitations. Historically, when memory ASPs increased, one or more manufacturers increased capacity, driving down ASPs, or reduced prices, hoping to capture market share. There are only a handful of semiconductor memory manufacturers remaining. So far, all of them have held fast, controlling capacity additions while maintaining or increasing prices. But, CAPEX has expanded dramatically. There will be pressure to fill the new fabs. There is also an X factor. Three companies in China are investing $56 billion in DRAM and NAND capacity. This is bound to change the competitive landscape of the memory market as these production facilities ramp. ASPs are already experiencing some softening.
Pressure from OEMs and added capacity will soon drive down memory ASPs. When that happens, total semiconductor sales will be affected. Semico’s IPI (Inflection Point Indicator) has turned down, forecasting a downturn in total semiconductor sales. Semico’s forecast for total semiconductor sales growth in 2018 is 14.4 percent, down from 2017.
The semiconductor sales cycle is often independent of economic cycles, but an economic downturn can exacerbate a semiconductor sales downturn. Economic expansions do not last forever. There are positive signs. Unemployment is near a 50-year low. The economy is still growing. But, there are also troubling indicators. The gap between the wealthy and the rest of the population is still high. The 2017 tax cut may generate inflationary pressure, and the U.S. Federal Reserve has already increased interest rates. Recent tariff increases are expected to have a negative effect, as they have in the past. The U.S. Treasury yield curve has been a very accurate predictor of economic downturns. As shown in the chart, below, that curve has turned down. An economic downturn seems likely in 2019.
The U.S. stock market has enjoyed a tremendous rally over the last nine years, but analysts are noting that the stock market is ahead of the economy, that stocks may be overvalued, suggesting that a market correction is coming.
Semiconductor memory ASPs are going to fall. Semiconductor sales are going to decline. The U.S economy is facing a probable downturn. The stock market may soon take a hit.
Winter is coming!
With 30+ years' experience in the electronics industry, Morry Marshall brings a wealth of industry insight to the Semico Research & Consulting Group. Marshall’s history of multi-disciplinary experience in sales, distribution, marketing, strategic planning and product development brings a unique level of clarity and perspective to Semico clients. Through Semico’s consulting services Morry provides objective solutions and recommendations.
