MOUNTAIN VIEW, CA – A just-released survey of some 85 senior-level executives at semiconductor companies finds a majority sees R&D and capital expenditures decreasing significantly next year.
As economic conditions and consumer spending continue to deteriorate, semiconductor executives are turning more pessimistic, and anticipate a steep decline in profitability during the next 12 to 18 months, says the consulting group that conducted the survey.
KPMG, which collaborated with the Semiconductor Industry Association to develop the survey, in November interviewed 85 executives at device, foundry and fabless manufacturers. The majority see lower spending and significant workforce contraction. Growth projections are much more pessimistic this year compared to last, the firm says.
Fifty-two percent of those surveyed expect revenue to decline, including 39% who see a decline of greater than 6%. October results, in contrast, showed 60% of execs projected revenues to increase.
These views represent a major decline compared to the 99% who expected revenue growth last year, with approximately half (52%) estimating growth in excess of 10%.
Execs are expecting negative trends on profitability as well, says the firm. When asked to project profitability over the next 12 to 18 months, 61% surveyed in October said profits would decline, including 20% who project a decrease of more than 10%, while 69% of November respondents see a decline, with 33% estimating losses of more than 10%.
“Semiconductor execs are grappling with profitability outlooks while dealing with the dynamics of a depressed economy, pricing pressures, diminished consumer spending, and workforce issues,” said Gary Matuszak, leader of KPMG’s global information, communications and entertainment practice. “Executives are clearly telling us the negative industry trends we began to see in September are expected to deteriorate further, and these companies will need to become more efficient in managing costs – especially with tight credit markets.”
The negative profitability trend is expected to extend beyond the short-term, with 47% of overall respondents saying they see global semiconductor profitability as volatile, unpredictable or declining during the next three years.
The anticipated decline in profits and revenue growth is expected to have a significant impact on the global semiconductor workforce. KPMG found 70% of executives surveyed in November expect their companies to decrease their global workforce in the next 12 months, including 40% who see a decrease of more than 6%. Only 16% say they will expand the global workforce. This outlook is much more negative than the views of the executives surveyed in October, when 38% said they saw layoffs coming at their companies.
While those surveyed indicated some hope of revenue growth opportunities in consumer, computing and handheld wireless markets, the current decline in consumer electronics and handset spending will mute even these growth opportunities in the short term. In addition, KPMG found green semiconductor products are expected to become a larger part of the revenue stream. However, the current economic conditions make it harder to predict consumer spending, lending uncertainty to bottom-line profits in the near-term. This uncertainty can be seen in the negative views expressed on the anticipated capex and R&D spending compared to previous years.
To wit, 28% of executives surveyed in November expect R&D spending to increase in the next fiscal year, down from 75% in 2007. Conversely, 48% see R&D investment falling, including 20% who anticipate the decrease will be in excess of 10%.
While R&D spending is expected to decrease, executives did indicate investment in green semiconductor product initiatives would continue to grow during the next two to three years. Seventy-seven percent see their companies increasing R&D investment in greentech, including 49% who see that investment increasing more than 10%. Seventy-six percent said their customers have extremely high interest in green semiconductor products. In addition, 54% estimate green products account for less than 20% of current revenue; however, 84% see green products accounting for more than 20% of revenues in five years. Thirty-six percent see more than 60% of their companies’ revenues coming from green products in five years.
Three key geographic markets are expected to see the bulk of R&D investment during the next three years: the US, Europe and China. Forty-four percent said the US would be the top allocation market, followed by Europe with 14%, and China with 10% of responses.
Further indicating the ongoing volatility in the semiconductor industry, KPMG found 52% of November respondents expect capex spending to plummet, with 36% anticipating a decrease of greater than 10%. In October, only 38% expected capex to decrease.
Interestingly, in an economic climate where workforce contraction is expected, 76% of executives indicated the availability of a skilled workforce was very important in determining the allocation of capex spending. During the next three years, critically skilled workers are expected to be hired from several key markets, including 28% from the US, 23% from China, 12% from Korea and 11% from Taiwan.
“Despite poor conditions and reduced spending, these companies need to place an emphasis on R&D in an effort to foster innovation and identify broader application markets for semiconductors,” said Matuszak. “Another element of that growth investment will be targeted at ensuring a skilled workforce, which becomes increasingly important as competition intensifies.”
