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Hello, my name is Ron Steger, Partner In Charge of KPMG's Global Semiconductor Practice. I'm here to discuss KPMG's 2011 Global Semiconductor Survey, which is now in its seventh year.
KPMG conducts this annual survey to identify trends and issues in the global semiconductor industry and to gain critical insights into the forces shaping the semiconductor market over the next three years.
This year's survey is titled "Semiconductor Executives Temper Growth Expectations" because the results reflect a shift toward a less positive sentiment about the industry's prospects for revenue growth in 2012. Despite some favorable application markets, which we'll discuss in this podcast, overall semiconductor industry confidence declined in this year's survey.
Before I review the survey results, let me briefly give you some demographic information about the respondents. Our survey includes responses from 155 senior-level executives at the leading global semiconductor companies. This year's responses reflect a stronger international mix, with 35 percent of respondents coming from Asia-Pacific, compared with just 16 percent in 2010.
In addition, 50 percent of the responding companies had sales of over $1 billion and 16 percent had sales in excess of $10 billion. More than half, 53 percent, of the respondents were C-level executives (chief executive, financial, marketing, operating, technology officers). Overall, our survey reflects the views of many senior industry leaders.
Confidence index declinesIf there is a single headline in this year's survey, perhaps it's the drop in our semiconductor business confidence index. This important indicator of respondents' views combines several growth and spending metrics -- including revenue growth, capital spending, workforce growth and R&D spending, to provide a view of executives' sentiment.
Over the past five years, the index has emerged as a reliable bellweather of future industry results. This year, the index stands at 46, indicating a slightly pessimistic outlook among semiconductor executives.
This year's index compares with 60 in last year's results and 61 in 2009, but is still higher than the value of 36 recorded during the depths of the 2008 downturn. This indicates executives' expectations that reflect more of a 'speed bump' for the industry than a double-dip downturn.
Survey highlightsNow let's look at some of other survey highlights.
Revenue growthRegarding revenue growth, 63 percent of our respondents expect their company's semiconductor revenue to increase in the next fiscal year, compared to 90 percent last year. The number of respondents expecting revenue declines of more than 10 percent was 4 percent this year, compared with only 2 percent last year.
ProfitabilityThe forecast for profitability in 2012 also reflects slightly reduced optimism, with 60 percent of respondents calling for profitability growth, compared with 60 percent in last year's results.
Growth driversLooking at favorable application markets, nearly two-thirds (62 percent) of our respondents believe current revenue growth will be driven by wireless handsets and other wireless communications devices, followed closely behind by computing at 59 percent and consumer electronics at 51 percent.
This marks a slight shift from last year's survey, when computing was ranked behind consumer electronics as an industry growth driver. The shift toward computing likely reflects growth in the tablet market, PC demand in developing markets, ultrabooks and other factors.
Geographic growthChina is still considered the most important geographic area for semiconductor revenue growth over the next three years, with 60 percent of respondents giving it the highest rating. This compares with 70 percent last year, and 78 percent in 2009.
The United States has seen its expected importance as a growth market increase to 50 percent this year, compared with 47 percent last year. This growth is possibly reflecting an improvement in U.S. economic conditions.
WorkforceThis year's muted growth outlook is also reflected in employment expectations, with 59 percent of respondents calling for their workforce to remain flat or to grow less than 5 percent. Last year, 65 percent of respondents had similar expectations. Overall, 21 percent of respondents this year indicated plans to reduce headcounts, compared with only 6 percent last year.
Counterfeiting and intellectual property litigationFor the first time in this year's survey, we asked executives about the impact of counterfeiting on the semiconductor industry. A third of the respondents identified counterfeiting as a significant challenge, with a third saying the practice adversely affects at least 5 percent of the industry's global revenue. In response, executive plans measures more sophisticated identification, testing, and verification procedures. More than half, 53 percent, of the executives expect the cost of responding to intellectual property litigation to increase over the next three years.
Mergers & AcquisitionsDampened expectations also apply to semiconductor M&A activity, with only 62 percent of respondents expecting growth in M&A, compared with 76 percent in 2010. 55 percent of the executives said they don't expect their company to be involved in any acquisitions, and 70 percent don't believe they will divest any assets.
R&D spendingThe revenue and profitability outlook is also influencing plans for R&D investment, with 32 percent of respondents expecting semiconductor R&D spending to increase between 1 and 5 percent in the next fiscal year, compared with 36 percent last year. The number of executives who expected R&D spending to increase between 6 and 10 percent fell to 19 percent this year, from 30 percent last year.
Capital spendingRespondents were overall more pessimistic about capital spending this year than they were about R&D. Only 10 percent of the executives expected capital spending growth of more than 10 percent this year, compared with 23 percent in last year's results.
Technology roadmapWhen asked about future technology directions for the semiconductor industry, 39 percent of respondents expect the industry to shift to 450-millimeter wafers, despite the high cost of equipping fabs. These executives believe Moore's law will continue to have a major impact at 450 millimeters. 40 percent of respondents believe production at a sub-20-nanometer node will have a greater impact on the industry than the production of 450-millimeter wafers.
ConclusionTo conclude this podcast, I want to say that after two years of impressive growth rates, semiconductor industry executives are preparing for a dampening of growth in 2012. While the good news is that no one is calling for a repeat of the 2008 downturn, the percentage of executives reporting expectations of revenue growth fell from 90 percent last year to 60 percent this year.
Interestingly, there is a smaller difference between expectations of company profitability over the next fiscal year. 60 percent of executives believe profitability will increase, compared with 65 percent last year. Companies are planning a number of defensive measures to improve profitability, including reducing investments in employment growth, R&D spending, capital investments, and M&A activity.
We'd like to thank the semiconductor industry leaders who shared their opinions for this year's survey. We hope you find their insights useful, and we would appreciate any feedback you would like to offer on this survey.
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