Semiconductor Industry Model Broken

Is the semiconductor industry model broken? Did companies cut back so much that the normal mechanisms of the supply chain don’t work?

That is what will lead to a 2011 with shortages, allocation and price rises, reckons Malcolm Penn CEO of Future Horizons talking at IFS2011 this morning.

Underlying it is a broken industry model which means that supplies of many essential parts of the supply chain are tight now and will be tight going into 2012.

“The lead-time on capital equipment is now one year,” said Penn pointing out that means you’re not going to increase output for two years from making the decision to order new production equipment.

So tight capacity should keep ASPs rising. But the industry doesn’t believe that, said Penn, because the industry assumes that ASPs always drop and is temperamentally more receptive to bad news than good news.

“ASPs have been going up for four quarters and are increasing but the CEOs deny it,” said Penn.

Looking for bad news in order to make cuts and postpone investment is the CEO mind-set nowadays.

The industry’s self-perception is ‘awful’, said Penn. “From the CEOs to the trade bodies they’re doing a fantastically good job of talking the industry down.”

That is compounded by a broken industry supply chain where people talk to the person next to them in the chain, but don’t talk either to the end customer who’s driving demand, or to the people at the bottom of the supply chain who supply the basic materials and tools without which nothing can happen.

The result of this disaggregation is screw-ups like the Nissan car factory stoppages last year.

That, said Penn, was only the beginning of it. The industry is going into recovery mode without the means to increase capacity to meet the demands of the upturn.