As economic conditions and consumer spending continue to deteriorate, semiconductor executives offer views on 2009 revenue growth that continue to turn more pessimistic, and anticipate a steep decline in profitability over the next 12 to 18 months, according to a recent global survey of semiconductor company executives conducted by KPMG LLP, the U.S. audit, tax and advisory firm. In addition, the majority of executives see R&D and CapEx investment decreasing significantly next year, and see significant workforce contraction in a period where the need for critical workforce skills is high.
KPMG’s global survey, conducted in collaboration with the Semiconductor Industry Association in October and November, surveyed 85 senior level executives at the semiconductor companies, including device, foundry and fabless manufacturers. According to the results, the growth projections are much more pessimistic this year compared to last year and continued to regress during the response solicitation period, as market and industry conditions continue to deteriorate at an accelerating rate.
In fact, when comparing responses from November to October, it was clear that executive sentiment on industry performance became decidedly more volatile. Fifty-two percent of those surveyed in November expect revenue to decline, including 39 percent who see a decline of greater than six percent. That is in stark contrast to October results when 60 percent of execs projected revenues to increase.
These views represent a major decline compared to 99 percent who expected revenue growth last year, with approximately half (52 percent) estimating growth in excess of 10 percent.
The KPMG study found that execs are also clearly expecting negative trends on profitability. In fact an already stark outlook from October respondents turned even more negative in November. When asked to project profitability over the next 12 to 18 months, 61 percent surveyed in October said profits would decline, including 20 percent who project a decrease of more than 10 percent, while 69 percent of November respondents see a decline with 33 percent estimating losses of more than 10 percent.
“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 (ICE) practice. “Executives are clearly telling us that 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.”
According to executives, the negative profitability trend is expected to extend beyond the short-term, with 47 percent of overall respondents saying they see global semiconductor profitability as volatile, unpredictable or declining over the next three years.
The anticipated decline in profits and revenue growth are expected to have a significant impact on the global semiconductor workforce. KPMG found that 70 percent of executives surveyed in November expect their companies to decrease their global workforce in the next 12 months, including 40 percent who see a decrease of more than six percent. Only 16 percent say they will expand the global workforce. This outlook is much more negative than the views of the executives surveyed in October, when only 38 percent said they see workforce contraction at their companies.
Investment will fall, but greentech and workforce skills are top of mind
While the executives surveyed indicated some hope of revenue growth opportunities in consumer, computing and hand held wireless markets, the current decline in consumer electronic and handset spending will mute even these growth opportunities in the short term. In addition, KPMG’s survey found that 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.
In fact, only 28 percent of executives surveyed by KPMG in November indicated that they expect R&D spending to increase in the next fiscal year – down significantly from the 75 percent response to the same question in KPMG’s 2007 survey. Conversely, 48 percent see R&D investment falling, including 20 percent who anticipate the decrease will be in excess of 10 percent.
While R&D spending is expected to decrease, executives did indicate that investment in green semiconductor product initiatives will continue to grow over the next two to three years. In fact, 77 percent see their companies increasing their R&D investment in greentech, including 49 percent who see that investment increasing by more than 10 percent. This investment direction coincides with executive views on customer interest in green products as well as how large a portion of revenue streams green semiconductor products will become. Seventy-six percent of execs surveyed said their customers have extremely high interest in green semiconductor products. In addition, 54 percent of executive surveyed estimate that green products account for less than 20 percent of current revenue, however, 84 percent of executives see green products accounting for more than 20 percent of revenues in five years. Thirty-six percent of execs see more than 60 percent 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 over the next three years, including the U.S., Europe and China. Forty-four percent of execs said the U.S. would be the top allocation market followed by Europe with 14 percent and China with 10 percent of responses.
Further indicating the ongoing volatility in the semiconductor industry, KPMG found that 52 percent of November respondents expect CapEx spending to plummet, with 36 percent anticipating a decrease of greater than 10 percent. In October only 38 percent expected CapEx to decrease.
Interestingly, in an economic climate where workforce contraction is expected, 76 percent of executives indicated that the availability of a skilled workforce was very important in determining the allocation of CapEx spending. Over the next three years critical workforce skills are expected to be hired from several key markets, including 28 percent from the U.S., 23 percent from China, 12 percent from Korea and 11 percent 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,” added Matuszak. “Another element of that growth investment will be targeted at ensuring a skilled workforce, which becomes increasingly important as the competition intensifies.”
KPMG LLP, the audit, tax and advisory firm, is the U.S. member firm of KPMG International. KPMG International’s member firms have 123,000 professionals, including more than 7,100 partners, in 145 countries.