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Semiconductors are the building blocks (used to make integrated circuits/computer chips, flash memory) of most all consumer electronics, including PCs, mobile phones, MP3 players, etc. A semiconductor is a solid whose electrical conductivity is in between that of a metal and that of an insulator. Most commercial semiconductors are created using silicon. There are several different semiconductor industries: Semiconductor - Equipment & Materials, Semiconductor - Broad Line, Semiconductor - Integrated Circuits, and Semiconductor - Foundry.

While the current 20 year annual average growth of the semiconductor industry is on the order of 13%, this has been accompanied by equally above-average market volatility, which has lead to significant if not dramatic cyclical swings. The semiconductor industry has gone through 6 major cycles since the 1970’s, caused mainly from worldwide recession, overcapacity, and inventory burn.

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When the semiconductor industry cyclically bottoms out, the semiconductor industry's value chain both upstream (i.e. semiconductor equipment manufacturers) and downstream (i.e. PC/consumer electronics manufacturers) are also affected. The last major semiconductor downturn occurred in 2000-2002, and was considered to be the harshest contraction the industry ever experienced. Global semiconductor sales plummeted from over $200B in 2000 to $160B in both 2001 and 2002. Semiconductor revenue was on an upswing since January 2002, however, the financial crisis has lead to a contraction in revenue as 2008 sales were 2.8% lower then 2007.[3] Sales in December 2008 were down 22% y-o-y,[4] reflecting the true impact of the financial crisis.

Cyclicality Drivers

Worldwide recession

The $250B semiconductor industry generates over $1,200B in electronics systems business and $5,000 billion in services, representing close to 10% of world GDP. This correlation to the global economy and its own business cycles is a main driver for semiconductor cyclicality.

Consumer Electronics/Computer Demand

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Obviously linked to the health of the economy, demand for consumer electronics including PCs, digital TVs, iPods, etc. are strongly correlated with semiconductor demand. As PCs inch ever closer to saturation among developed countries, demand for them will decrease as well as for the chips used to make them work.


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The semiconductor industry's operating costs and capital expenditures are uniquely high because new manufacturing plants, or fabs, can cost them up to 25% of annual revenues, or as much as $3-4B. Running them overcapacity for too long can decimate a semiconductor company's profits. Unfortunately, large capital expenditures are a continuous pain point for this industry because advances in technology, i.e. the ability to put more functionality on a smaller chipset (see Moore's Law), often render older fabs and all of the expensive machinery in them obsolete. Thus, the frequent need for new, state-of-the-art fabs can often create overcapacity scenarios as the need for technology innovation doesn't match current market demand.

Inventory Burn

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It's a well known fact that many consumer electronics have short product lifecycles. This creates inventory complications among players in the electronics value chain because of the inherent difficulty in predicting how many electrical components will be needed for a certain product before that product becomes obsolete. Given that semiconductor manufacturers need to run their fabs at high capacity to be cost-efficient, they are at risk of creating large inventories of product destined for last year's model of the iPod that no one wants anymore.

Industry Consolidation/Maturation

The semiconductor industry is consolidating. National Semiconductor (NSM) agreed to acquire Cyrix Corporation and Intel (INTC) said it would acquire Chips and Technologies Inc. With growing consolidation, it is easier to mitigate the volatility caused by overcapacity and inventory burn because large players can predict downturns and thus pre-emptively slow down manufacturing. Analysts are predicting further semiconductor consolidation, in part leading to a maturation of the industry that will slow growth but also volatility.

Winners and Losers in Semiconductor Cyclicality

Semiconductor Manufacturers

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Intel (INTC), Advanced Micro Devices (AMD), Samsung, Vishay Intertechnology (VSH) and Maxim are major semiconductor manufacturers that could be hit hard in a downturn, especially if their pre-existing fabs are rendered obsolete or if they've invested too heavily in new fabs in a time of low sales. A severe contraction in this market isn't always a bad thing, however. Intel (INTC), by far the largest semiconductor player, used the 2000-2002 downturn to refocus its energies by investing in new facilities that would eventually reap higher profits through greater production efficiencies as the industry swung back into its expected upturn. It also diversified into WiFi and WiMax chips, knowing that PCs were nearing a saturation point in developed countries meaning that microprocessor sales (by far Intel's most profitable business) would inevitably slow down. Recently, Intel decided to build a 300mm wafer fabrication plant in Dalian, a city in northeast China. The $2.5 billion project, dubbed Fab 68, will be the company's first wafer fab in Asia. The facility is scheduled to begin production of chipsets in the first half of 2010.

Semiconductor Foundries

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Silicon wafer shipments from wafer suppliers to semiconductor makers confirm current strong growth trends in semiconductor industry

Taiwan Semiconductor Manufacturing Company (TSM) and United Microelectronics (UMC) are two semiconductor foundries that manufacter chips for the likes of Broadcom (BRCM) and Xilinx (XLNX), two completely "fabless" chipmakers who focus most of their attention on innovative chip design and marketing. Semiconductor foundries, who focus solely on churning out chips, in theory, can better manage the huge investments needed to keep up with the latest in manufacturing technology. These foundries of course will sink and swim with their chip-maker partners.

Semiconductor Equipment Manufacturers

Applied Materials (AMAT), KLA-Tencor (KLAC), and AVX (AVX) are leading semiconductor equipment manufacturers. The link between semiconductor equipment manufacturers and chip-makers is very strong. When the chip-makers decrease capital expenditures in expectation of slower growth, these companies will feel the contraction.

Electronics/Computer Hardware Manufacturers

Dell (DELL), Hewlett-Packard Company (HPQ), and Apple (AAPL) are leading examples of electronics/computer hardware manufacturers who depend on chipset innovation to help make their devices run faster, store more information, and provide more functionality. A contraction in the semiconductor industry often necessitates lower capital expenditures, meaning that new fab with the faster chip will take longer to build, and that next generation computer with the faster chip won't be ready on time. This could hurt overall consumer electronics computer sales. On the other hand, a glut of semiconductors can drive OEM manufacturing costs down given downward pressure on chip prices, which could help OEMs expand per unit margins and potentially mititgate lower sales volume.

Given to a chicken vs. egg analogy, most semiconductor downturns are blamed for waning global demand for electronics/computer hardware.


  1. Semiconductor Shipment Growth
  2. Semiconductor Value Chain
  3. Semiconductor Industry Association Press Release, 2/2/09
  4. Semiconductor Industry Association Press Release, 2/2/09
  5. PC Growth
  6. Electronic System Semiconductor Content
  7. Top Semiconductor Companies
  8. Wafer Shipments
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