China's slowing electronic industry growth is leading to reduced demand for semiconductors, prompting iSuppli Corp to trim its revenue forecast for chips sold in China in 2006.
iSuppli now expects China's semiconductor revenue in 2006 to rise in a range from 11 per cent to 15 per cent. Such growth would put China's semiconductor market at a size varying from $41 billion to $43 billion at the end of the year. This is down from iSuppli's year-ago forecast of 18 per cent growth in 2006.
China's semiconductor market amounted to $37 billion in 2005, up 13 per cent from 2004.
These figures do not reflect all chip purchasing for production of electronic equipment in China, but rather all semiconductor buys that were actually billed in China. Due to China's complex supply chain, many electronic systems made in the nation use chips that were actually purchased in other regions.
The reduction in iSuppli's semiconductor forecast reflects a general slowdown for Chinese electronics system production said Byron Wu, director, china research for iSuppli. Although China's electronics market continues to growseveral key issues such as over-heated investmentincreased operational costs and reduced corporate earnings threaten to stall the expansion.
"For the country's semiconductor sectorwhat started as a breakout year is closing on a note of cautionfollowing disappointing sales in the third quarter. Much is riding on the upcoming holiday seasonwhich will drive semiconductor purchasing activity in the fourth quarter Wu added.
One of the major areas of weakness for China's semiconductor industry is in the telecom market. Most of the communications-oriented semiconductor suppliers serving this area suffered revenue declines of 20 per cent in the third quarter compared to the second quarter.
Another factor has been the implementation of the Reduction of Hazardous Substances (ROHS) restrictions, which has slowed the growth of China's electronics exports in the third quarter-and not only in telecom gear.
Other segments seeing export declines due to ROHS include mobile phones, white goods, televisions and DVD players.
While Chinese telecom gear revenue began bouncing back late in the third quarter, it is clear that this recovery is being generated by the outsourcing and subcontracting activities of foreign firms, rather than by the domestic manufacturers. Demand growth for the Chinese-made gear is not very strong presently, iSuppli believes.
For consumer electronics, the third quarter was robust due to seasonal exports. Because of the seasonal peak in the third quarter, iSuppli does not expect to see much growth in consumer-electronics export revenue in the fourth quarter. However, some areas will see increases in exports during the last three months of the year, including liquid crystal display (LCD) TVs, mobile phones, MP3 players and portable media players (PMPs).
The semiconductor industry enjoyed strong growth in revenue in the first half of the year due to major increases in demand. This is mainly because of leading multinational OEMs and contract manufacturers expanding their production in China of products including mobile phones, MP3 players, digital still cameras and video game consoles.
Furthermore, chip sales were boosted by Chinese companies' efforts to export as many products as possible before the implementation of ROHS in July. This resulted in extended semiconductor lead times due to capacity constraints.
Another factor boosting the chip market in the first half was China's field testing of 3G wireless communications systems, which boosted semiconductor demand. This led to the domestic telecom system makers outperforming the global market and boosting semiconductor sales in the first half.
Unfortunately, by the middle of the second quarter, local OEMs and semiconductor distributors in China began to send order cancellations and delays to semiconductor makers. This resulted in a rise in chip inventory in the third quarter. Not surprisingly, Chinese pure-play foundry suppliers witnessed declining factory utilisation rates in the third quarter as both Integrated Device Manufacturers (IDMs) and fabless companies reduced their demand for outsourced chip production.
With many major application areas so weak, China's chip market appears to be suffering from a lack of a killer application to drive sales.
Semiconductor suppliers have placed their hopes on the Chinese New Year season, and are anticipating strong demand for chips for 3G mobile phones, digital televisions (DTVs) and internet protocol televisions (IPTVs) in late 2006.
However, with the arrival of this demand far from certain, China's chip industry is keeping its fingers crossed for a strong holiday season.
For more information, visit www.isuppli.com
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