4Q03 Update: Wired Communications Semiconductor Forecast,

Transcription

1 Forecast Analysis 4Q03 Update: Wired Communications Semiconductor Forecast, Abstract: On the strength of application-specific semiconductor revenue, the revised wired communications semiconductor forecast for 2003 notes 6 percent growth will be stronger, with growth of 15 percent. By Peter Middleton Strategic Forecast Statements Early 2003 witnessed further weakness in IT spending in enterprise markets, as well as continued reduction of capital expenditure in the service provider space, extending the spending trough in wired markets; now, however, wired communications semiconductor revenue is recovering. Gigabit Ethernet, broadband access and Voice over Packet Network represent bright spots in the market outlook. After a disappointing decline of 21 percent in 2002, the wired communications semiconductor market will rebound weakly in 2003, with a forecast gain of 6 percent; 2004 will represent the true recovery year, with growth increasing to 15 percent, and 2005 will represent another solid year with 16 percent growth predicted. Publication Date: 16 December 2003

2 2 4Q03 Update: Wired Communications Semiconductor Forecast, Forecast Overview In the face of continuing economic uncertainty, Gartner Dataquest has developed three forecast scenarios for the wired communications semiconductor market. These are best case, most likely case and worst case. Changes Compared With Previous Forecast Drivers and Inhibitors The forecast growth for 2003 was increased to 6 percent in 2003 but lowered to 15 percent in 2004 (vs. 4 percent and 17 percent, respectively, in the previous quarterly forecast). The wired communications semiconductor market has been in a recovery phase since early 2003, but as a result of weak infrastructure equipment spending expectations, it will underperform the semiconductor industry as a whole. Ongoing Drivers and Inhibitors Several drivers and inhibitors remain the same from previous quarters. See "3Q03 Update: Wired Communications Semiconductor Forecast, ," SEMC-WW-DP Those factors are as follows. Enterprise CPE The following drivers underlie Gartner Dataquest's forecast: LAN upgrades from Fast Ethernet to Gigabit Ethernet will spur the growth of the LAN integrated circuit (IC) market into Vendors at the semiconductor and system level are reporting growth in Voice over IP (VoIP) systems and terminals, albeit off a small base. Adoption of wireless LAN and VoIP technology will also contribute to LAN market growth. The following inhibitors could affect Gartner Dataquest's forecast: ThecontinuedtentativenatureofenterpriseITspending in particular, the infrastructure component of that expenditure could have a negative impact. Saturation of the overall LAN market and the lack of compelling demand drivers could lead to a slow, protracted upgrade cycle. Consumer CPE The following drivers underlie Gartner Dataquest's forecast: Adoption of broadband Internet connections will continue, albeit at a slowing pace. Strong price competition in the residential market will offset continued unit growth Gartner, Inc. and/or its Affiliates. All Rights Reserved. 16 December 2003

3 New residential broadband services will lead to upgrades of DSL and cable modems as well as increased market penetration. The use of networking technology in the home will continue to increase, which will augment the consumer customer premises equipment (CPE) market. The following inhibitor could affect Gartner Dataquest's forecast: TheslowupgradecycleforDSLandcablemodemscouldleadtoa contraction of this sector once the market completely saturates. Early home networks are data-oriented, broadband-sharing networks. The evolution of home multimedia entertainment networks, expected to be a gradual process, could be held back by usability and interoperability issues. Access/Switching The following drivers underlie Gartner Dataquest's forecast: National initiatives to deploy true broadband to every home and business, particularly in Japan and Asia/Pacific, require deployment of new access and edge equipment. Switching infrastructure will continue to migrate from legacy timedivision multiplexing technology to packet-switched architectures. The following inhibitor could affect Gartner Dataquest's forecast: Market saturation of DSL and cable modem networks particularly in markets such as South Korea, which deployed the technology rapidly may depress growth in those markets. Core Transport The following driver underlies Gartner Dataquest's forecast: Core networks have generally been overbuilt. An upturn in this market will require the consumption of excess transport bandwidth. This will come about through the aggregate increase in usage by end users. Recovery at the access and customer premises level will therefore eventually drive upgrade requirements in the core. This process will unfold during the next one to three years. The following inhibitor could affect Gartner Dataquest's forecast: The pace of recovery in equipment expenditure will be limited by the rate of service revenue growth at providers and by the lack of a clear path to profitability for large-scale network build-outs Gartner, Inc. and/or its Affiliates. All Rights Reserved. 16 December 2003

4 4 4Q03 Update: Wired Communications Semiconductor Forecast, Forecast Scenario Commentary 2003 The wired communications semiconductor market has been improving since the first quarter. The signs at the macroeconomic level point to a sustainable trend, but there is still downside risk. In the telecommunications space, service provider capital expenditure has trended lower in 2003 than in This has been counterbalanced by growth in the enterprise and consumer CPE markets. In addition, channel inventories of telecom line card components have fallen to the point where orders are increasing. Applications that are helping drive semiconductor growth in 2003 include LAN network interface cards (NICs), LAN on motherboard (LOM), LAN switches and consumer broadband CPE. Total revenue for 2003 is projected at $14.6 billion,a6percentadvanceover The forecast scenario for 2004 calls for a return to stronger growth in the communications semiconductor market. Revenue is projected to increase 15 percent to $16.9 billion. At that point, the global economy on average, and the U.S. economy in particular, should have shifted into a higher growth phase. Telecom service providers, after a prolonged period of belttightening, are expected to regain the wherewithal to increase investment in their communications infrastructure. At the same time, IT spending should increase in response to overall economic growth, stimulating enterprise infrastructure spending. The recovery in the communications sector is anticipated to coincide with similar developments in other semiconductor application segments. Because of a lack of capital expenditure by the industry through 2003, leading-edge fab capacity constraints are expected. Tables 1 through 3 provide further details on our forecast Gartner, Inc. and/or its Affiliates. All Rights Reserved. 16 December 2003

5 5 Table 1 Worldwide Forecast Revenue (Millions of Dollars) 1Q02 2Q02 3Q02 4Q Best Case 3, , , , ,773.4 Most Likely Case 3, , , , ,773.4 Worst Case 3, , , , , Q03 2Q03 3Q03 4Q Best Case 3, , , , ,663.2 Most Likely Case 3, , , , ,626.6 Worst Case 3, , , , , Q04 2Q04 3Q04 4Q Best Case 4, , , , ,143.5 Most Likely Case 3, , , , ,854.1 Worst Case 3, , , , , Q05 2Q05 3Q05 4Q Best Case 4, , , , ,137.2 Most Likely Case 4, , , , ,600.5 Worst Case 3, , , , ,633.7 Source: Gartner Dataquest (December 2003) Table 2 Worldwide Forecast Revenue, Sequential Growth (Percent) 1Q02 2Q02 3Q02 4Q Best Case Most Likely Case Worst Case Q03 2Q03 3Q03 4Q Best Case Most Likely Case Worst Case Q04 2Q04 3Q04 4Q Best Case Most Likely Case Worst Case Q05 2Q05 3Q05 4Q Best Case Most Likely Case Worst Case Source: Gartner Dataquest (December 2003) 2003 Gartner, Inc. and/or its Affiliates. All Rights Reserved. 16 December 2003

6 6 4Q03 Update: Wired Communications Semiconductor Forecast, Table 3 Worldwide Forecast Revenue, Year-Over-Year Growth (Percent) 1Q02 2Q02 3Q02 4Q Best Case Most Likely Case Worst Case Q03 2Q03 3Q03 4Q Best Case Most Likely Case Worst Case Q04 2Q04 3Q04 4Q Best Case Most Likely Case Worst Case Q05 2Q05 3Q05 4Q Best Case Most Likely Case Worst Case Source: Gartner Dataquest (December 2003) Gartner Dataquest Perspective Enterprise CPE Semiconductor vendors report continued increasing orders in Gigabit Ethernet products targeted at both switch interfaces and client interfaces (NIC and LOM). Upgrades in client interfaces have led the infrastructure upgrade cycle. Gigabit Ethernet products are growing at the expense of older 10/100- Mbps technology. Vendors of 10/100-Mbps Ethernet switches are evolving to Gigabit Ethernet rates. Design activity picked up in the first half of 2003, and as of the third quarter Gigabit Ethernet switching application-specific standard products and physical layer components had started to ship in high volumes. Gigabit Ethernet interfaces are penetrating all levels of the design spectrum, from small office/home office (SOHO)-oriented switched to larger-scale modular infrastructure. Accompanying the transition are aggressive moves to reduce the price premium for Gigabit Ethernet vs. Fast Ethernet to drive adoption. During 2003, these price decreases were expected to accelerate the penetration of Gigabit Ethernet in the switching market. One of the factors driving the price reductions is the entrance of additional viable vendors for physicallayer components Gartner, Inc. and/or its Affiliates. All Rights Reserved. 16 December 2003

7 Semiconductor and systems vendors report progress in IP-enabled and pure-ip premises switching line equipment and note strong growth, albeit off a relatively strong base compared with traditional enterprise voice lines. In 2003, the penetration of IP lines is expected to pass 10 percent of lines shipped worldwide. In addition to Gigabit Ethernet and IP-enabled voice, certain other areas of the corporate IT infrastructure market are expected to perform better than the overall market; for example, information security and storage. As a result, data communications vendors are diversifying their product lines into these areas to hedge against continued technology weakness. The market for IT infrastructure remains hesitant, with technology investments expected to lag improvements in the overall corporate earnings environment. Consumer CPE ThehomeCPEmarketcontinuestogrowwellonaunitbasis.BothDSL CPE modem and cable CPE modem shipments are expected to grow by double-digit percentages in The home market is subject to strong pricing pressure, however. Cable modem shipments, in unit terms, continued to gain strength in the third quarter of 2003, aided by pricing promotions by vendors such as Comcast in the United States. In the DSL modem market, vendors report that increased single-chip functional integration has contributed to average selling price (ASP) stability in application-specific products, while the overall bill of materials (BOM) of the modems continues to decline steadily. To counteract declining ASPs that resulted from a high level of competition, applicationspecific semiconductor vendors are looking to increase functional integration. In the Japanese market, which had undergone a surge in subscribership for high-rate DSL in the first half of 2003, growth in new subscribers fell off in the third quarter. Vendors blamed consumer confusion in advance of the launch of even-higher-speed services. The fourth quarter is expected to be weak. Going forward, DSL growth in Japan will be impacted by the nation's efforts to deploy fiber to customer premises. Access/Switching Some encouraging signs have emerged among access infrastructure IC vendors. Although developments in this area depend on carrier capital expenditure, improvements have been observed and anticipated. T/E carrier technologies, including T1/T3 and E1/E3 lines, have been selling well during the past few quarters. Central office shipments of DSL technologies grew modestly in 2003, driven by developments in Asia/Pacific. Japan registered large-scale deployments in late 2002 and the first half of Late in the year, growth was driven by China, with Europe following. North America is expected to lag into The market for cable modem termination systems will perform poorly in contrast to DSL,givenitsgreaterexposuretotheNorthAmericanmarket Gartner, Inc. and/or its Affiliates. All Rights Reserved. 16 December 2003

8 8 4Q03 Update: Wired Communications Semiconductor Forecast, Core Transport This beleaguered sector is finally stabilizing after the tremendous declines of the past two years. Modest increases in equipment spending are anticipated in 2004, depending on efforts by service providers to rationalize their finances. As of the third quarter of 2003, optical long haul remains depressed. At the semiconductor level, vendors report that the bulk of the excess inventory has been burned off, and vendors have been recording sequential revenue growth for the previous two quarters. Design activity decreased as the downturn progressed because systems companies continued cutting R&D budgets during the past two years. Many design efforts that were in the pipeline have been cut back, reducing the "bankability" of reported design wins, particularly those secured at startup vendors. However, R&D budgets have begun to stabilize, with many developments targeted at improving and augmenting existing designs. Vendors with well-targeted products also report increased activity in the metropolitan-area network sector, although it cannot offset the massive spending declines that have characterized the long-haul space. Gartner Dataquest Recommendations With the cutbacks in design engineering staff resulting from layoffs at the systems vendors, subsystem-level design outsourcing is becoming more common. Application-specific semiconductor vendors with appropriate systems expertise can therefore seek a more strategic role in the design process. For mass-market, low-cost systems, such as broadband-sharing routers or SOHO Ethernet switches, manufacturing specialists are seeking turnkey solutions that they can then offer to their customers for re-branding. At the high-end of telecom infrastructure systems and high-end enterprise systems, customers are more sophisticated and the requirement is for a higher level of design support than had been offered in the past. To move up the value chain in this fashion, semiconductor vendors need a greater understanding of systems design and the product needs of their customers' customers. Gartner Dataquest makes the following recommendations, by broad industry segment: Enterprise CPE Help original equipment manufacturers (OEMs) increase manageability, affordability and security. Help develop solutions that augment and extend existing solutions Gartner, Inc. and/or its Affiliates. All Rights Reserved. 16 December 2003

9 9 Consumer CPE Develop a Wi-Fi, or Wireless Fidelity, strategy through partnership, acquisition or internal development. Accelerate the customer's design cycle provide a turnkey solution or reference design, plus software. Work within the industry to drive standards and interoperability facilitate positive user experience to drive market acceptance and growth. Access/switching infrastructure Incorporate a wide standards base. Ensure backward compatibility and support for customers' legacy solutions. Core transport Help emerging OEMs capture a share in higher-end equipment. WorktocapturemoreofthelinecardBOM. Facilitate standards and interoperability efforts, but incorporate advanced features to avoid design-out. Develop products that support customers' platform initiatives. Key Issue What is the size and projected growth of the key application market segments? 2003 Gartner, Inc. and/or its Affiliates. All Rights Reserved. 16 December 2003

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