Verical Communications

The semiconductor industry is in full recovery mode. The Semiconductor Industry Association reported a 17% rise in semiconductor sales in Q2 of this year over Q1. As rosy as these results are, they are a full 20% down from Q2 2008. With the econolypse apparently behind us, is the electronics supply chain going to be able to avoid the volatility of the past?

It takes a long time to reactivate darkened manufacturing lines. Shutting them down is fairly quick compared to the chore of rehiring and retraining workers, re-establishing supplier contracts, and just squaring things away. When the economy fell off a cliff in 2008, a lot of capacity went off line in a very short span, and the industry faced “a red alert” on inventory oversupply. The excess has been burned off thanks to nimble chip makers and distributors, but now the industry faces a very tough challenge.

Chip sales are surging, and the forecast for the second half of 2009 is very strong, but this growth is off of a very low base. Fab plant restart costs are high, and it isn’t clear that the economy is out of the woods. Many estimates say the economy will recover slowly. Uneven growth in key markets further complicates planning at electronics firms: China is already growing briskly (even if you cannot take government figures at face value), the US is about to tip back into growth, while Europe is lagging with much work left to be done.

Given the uncertainty and the high costs of restarting fabs, expect firms to play it safe until actual demand has returned. When confidence returns, expect lots of mothballed capacity to come back. At the end of the day, the rest of 2009 looks like a recipe for volatility. It’s good to see the industry returning to normal!