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Market analysis

According to the Semiconductor Industry Association, a proposal to cut tariffs on new and innovative products such as multi-component semiconductors (MCOs) is likely to strengthen the global industry. Industry leaders from China, Europe, Japan, South Korea and the US met recently and recommended expanding the Information Technology Agreement (ITA), a global pact that provides for duty-free treatment of semiconductors and other IT products. The leaders want to make MCOs duty-free. MCOs enable multiple electronic components inside a single package to increase functionality, allowing for more sophisticated integrated circuit performance in smartphones, laptops and tablets. Inclusion of MCOs in an expanded ITA would result in global annual tariff savings of up to US$300mn and stimulate industry growth, according to the World Semiconductor Council.1

Leaders in the semiconductor industry are expecting modest revenue growth in 2014. Some encouraging trends as witnessed by industry leaders for the semiconductor industry include: (1) applications for semiconductors will continue to expand, particularly in the automotive and medical device segments and (2) markets are also expected to broaden geographically, with demand continuing to shift from traditional markets in North America and Europe to China and other emerging markets.1

According to Marketline, the most significant demand for semiconductors in 2014 should come from the automotive end market, as the consumption of electronic components for safety, infotainment, navigation and fuel efficiency continues to increase. The demand from wireless infrastructure manufacturers is also expected to increase, as transition to 3G and 4G infrastructure continues, volumes of data across the world are rising and there is a strong need for infrastructure build-outs to support these volumes and to deal with connectivity issues, such as network congestion, power reliability, privacy and security.2

The Semiconductor Industry Association (SIA) announced that the worldwide sales of semiconductors reached US$82.7bn during Q2’14, an increase of 5.4% over Q1’14 and a jump of 10.8% compared to Q2’13. Global sales for the month of June 2014 were US$27.57bn, marking the industry’s highest monthly sales ever. June sales were 10.8% higher than the June 2013 total of US$24.88bn. Year-to-date sales during the first half of 2014 were 11.1% higher than they were at the same point in 2013, which was a record year for semiconductor revenues. 3

Regionally, sales in June 2014 were up compared to last month in the Americas (4.9%), Asia Pacific (2.1%), Japan (2.1%) and Europe (1.9%). Compared to June 2013, sales increased in the Americas (12.1%), Europe (12.1%), Asia Pacific (10.5%) and Japan (8.5%). All four regional markets have posted better year-to-date sales through the first half of 2014 than they did through the same point last year. As compared to Q1’14, the Three-Month-Moving Average Sales for Q2’14 increased in the Americas (5.1%), Asia Pacific (6.0%), Japan (4.9%) and Europe (3.5%).3

According to Gartner Inc., worldwide semiconductor revenue is on pace to reach US$336bn in 2014, a 6.7% increase from 2013, and up from the previous quarter's forecast of 5.4% growth. Gartner believes the sequential growth in the second quarter of 2014 is likely to outpace market expectations. DRAM pricing remained firm, and this, coupled with growth in key system markets, is expected to help propel the DRAM market to exceed US$41bn in 2014. The memory market remained volatile owing to big supply and demand cycles, and Gartner predicts the next big memory oversupply downturn to hit in 2016, weakening overall semiconductor growth. Gartner also projected that the worldwide semiconductor capital equipment spending is expected to total US$38.5bn in 2014, an increase of 15% from 2013 spending of US$33.5bn.4

Despite overall growth in the sector, in Q2’14, Applied Materials generated orders of US$2.48bn, down by 6% sequentially, but up by 24% year over year. Silicon Systems Group orders were US$1.57bn, down by 6%, with decreases in DRAM and foundry. Applied Global Services orders, on the other hand, were US$552mn, up by 3%. Display orders of US$296mn were also down by 13% but remained at high levels, reflecting continued strong demand for TV production capacity. Applied Material’s net sales of US$2.27bn was down by 4% sequentially and up by 15% year over year. The company recorded GAAP gross margin of 43.8%, operating income of US$391mn or 17.3% of net sales, and net income of US$301mn, or $0.24 per diluted share.

Reflecting the overall sector growth, TSMC saw strength of demand for its wafers across all segments in the second quarter. By application, Computer, Communication, Consumer and Industrial/Standard all increased (quarter over quarter) by 14%, 19%, 31% and 25%, respectively, resulting in a quarter-over-quarter increase of 16.3% (with forex effect) in net sales. 28nm process technology contributed 37% of total wafer revenues for the quarter. Advanced technologies (40/45nm and below) accounted for 56% of total wafer revenues, up from 55% in Q1’14. Revenues from Fabless/System customers accounted for 85% of total wafer revenues in Q2’14. TSMC’s gross margin was 49.8% in Q2’14, 2.3% points higher than Q1’14, mainly due to higher capacity utilization, partially offset by unfavorable inventory valuation adjustments due to changes in utilization rates and the margin dilution from 20nm ramp.

  1. First Research - Semiconductor & Other Electronic Component Manufacturing, June 2014
  2. Marketline Report – Global Semiconductors, April 2014
  3. SIA, August 2014
  4. Gartner, July 2014

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