Forecast Analysis 4Q03 Update: Wireless Communications Semiconductor Forecast, 2003-2005 Abstract: Mobile communications semiconductor revenue was strong in the third quarter. 2003 is on a path for 16 percent growth. Mobile infrastructure continues to struggle. By Stan Bruederle and Alan Brown Strategic Forecast Statements The upgrade market for next-generation, feature-rich handsets is driving growth in saturated markets, particularly Europe and Japan. After a slow second quarter, demand in Asia/Pacific picked up in the third quarter. Overproduction in China has resulted in a buildup of inventory of 25 million to 30 million units; increasing demand will absorb this inventory by early 2004. Intensifying competition continues in the wireless semiconductor market, creating an environment in which companies will leave the market or merge. Tight control of capital spending by the operators and general economic weakness and financial constraints continue to inhibit the mobile infrastructure market, so our worstcase scenario for this segment is becoming more likely. The semiconductor value in the system is increasing as a proportion of the total bill of materials, mitigating the lack of system unit sales. Publication Date: 9 December 2003
2 4Q03 Update: Wireless Communications Semiconductor Forecast, 2003-2005 Forecast Overview The demand for mobile subscriber devices has grown while mobile infrastructure demand continues to be slow. As a result, we have raised our handset semiconductor revenue forecast and lowered our worst-case mobile infrastructure semiconductor revenue forecast. Changes Compared With Previous Forecast Drivers and Inhibitors Revenue for wireless communications semiconductors for 2003 was about $22.4 billion, less than a 1 percent increase compared with the secondquarter forecast. The mobile infrastructure segment decreased significantly from the second quarter because of continued slow demand from the operators. The handset estimate for 2003 is adjusted upward slightly from thesecondquarterbecauseofanincreaseinenddemandoverthepast two quarters. Demand for mobile handsets in saturated markets, such as Western Europe and Japan, is being driven by replacement handsets. These replacement handsets have enhanced functionality and improved data capability. However, the acquisition of new subscribers is still the main reason for growth in China, the United States and India. Shipments for 2.5-generation (2.5G) and non-wideband code division multiple access (WCDMA) third-generation (3G) technologies will increase. General packet radio service will gain in proportion to the 2G handsets through 2003 and 2004 and into 2005. The introduction of WCDMA services outside Japan in significant volume will occur in late 2004 and early 2005. 2G mobile terminals will lead the penetration of new regions and markets that require lower-cost solutions. Replacement handsets within Europe and the United States will support messaging, packet data access and location-based services and will become the new standard for these regions. Digital Cellular/Personal Communications Services Handsets The following drivers underlie Gartner Dataquest's forecast: Higher-than-expected memory pricing (flash memory, in particular) could boost the overall semiconductor content market and increase the growth rate for the semiconductor market. Advanced mobile terminals offering digital services and robust access to the Internet at aggressive prices could boost sales of 2.5G and 3G terminal systems. The greater number of units produced and higher semiconductor content resulting from these sales would boost semiconductor total available market. The rapid uptake of digital services, such as e-mail browsing and Multimedia Messaging Service picture messaging, could increase demand for 2.5G and 3G cellular phones. 2003 Gartner, Inc. and/or its Affiliates. All Rights Reserved. 9 December 2003
3 Forecast Scenario Commentary A higher-than-forecast uptake of color displays (in 2003 and 2004) would add to the component cost and increase overall semiconductor value in the handset market. The following inhibitors could affect Gartner Dataquest's forecast: Delays in 2.5G and 3G infrastructure deployment and a lack of popular and profitable services delay demand for advanced handsets and other terminals. Fashion may change, and mobile phone handsets may become less attractive to consumers. This trend would adversely affect replacement rates and reduce handset sales, thus decreasing the demand for semiconductors. Shortages of key components, such as liquid crystal display drivers, color displays and image sensors could restrict growth that would otherwise occur. Adverse scientific reports on the effect of nonionizing radiation on health could restrict phone sales or place limits on mobile phone use or design. Mobile Infrastructure The following drivers underlie Gartner Dataquest's forecast: Growth in demand is coming from the deployment of next-generation (2.5G and 3G) networks and growing demand in emerging markets in Asia/Pacific. Spectrum licenses (agreements) will force operators to upgrade or renew infrastructure equipment. The following inhibitors could affect Gartner Dataquest's forecast: Financial and economic conditions are holding back the rapid deployment of next-generation networks. Lack of compelling content is causing limited use of mobile data services by subscribers, resulting in lower-than-expected revenue for operators from this source. As a result, they are reluctant to expand their networks until they see greater demand. Competition for network service contracts is causing lower prices for infrastructure equipment, thus reducing equipment revenue. This situation causes demand for lower prices from semiconductor suppliers. 2003 The wireless communications semiconductor market is on track to continue to grow in 2003, with expected revenue of about $22.4 billion. Unexpected increases in the demand during this year have pushed the market higher than our original expectations. This was especially evident 2003 Gartner, Inc. and/or its Affiliates. All Rights Reserved. 9 December 2003
4 4Q03 Update: Wireless Communications Semiconductor Forecast, 2003-2005 in Asia/Pacific, but replacement handsets in Europe, the Middle East and Africa are also proving more popular than anticipated. While the handset market is showing signs of strength, the economic environment and other factors will continue to hold back the growth of the mobile infrastructure market. The infrastructure market has shown poor growth in 2003; because of this weak growth and a bleak outlook in the nearfuture,wehaveloweredtheforecastandreducedourworst-case scenario to zero growth or just above. Having said that, the operators, particularly in Europe, are approaching the deadlines incorporated in the 3G spectrum agreements. We therefore expect the demand for 3G infrastructure to grow in 2003 while investment in 2G and 2.5G declines. The general slow growth in the mobile infrastructure market will be a drag on overall market growth in the next year. 2004 The overall wireless market will grow by a robust 27 percent in 2004 to $28 billion after adjusting for slower growth in the mobile infrastructure market. We continue to see slower growth in this market and have lowered the growth for 2004 and reduced the worst-case scenario to indicate the possibility of minimal or no growth in 2004. During 2004, the global economy, and the U.S. economy in particular, should shift into a higher-growth phase. We anticipate that mobile communications operators will begin installing next-generation infrastructure equipment in earnest during 2004. Long-term demand for mobile handsets should continue to grow at a moderate pace of 10 percent. While we have increased handset unit growth in 2003, we expect that more moderate growth will occur in 2004 and beyond. Semiconductor revenue could grow faster than handset units because of the increasing value of semiconductor content in 2.5 and 3G phones, particularly in baseband and application processors and associated memory. 2005 During 2005, the demand for mobile infrastructure equipment should be stronger, based on the strong demand for 2.5G and 3G mobile handsets that we saw in 2003. This will in turn increase demand for mobile data services and thus the need to expand the mobile networks to support this new demand. If the demand for mobile data takes longer to develop than we expect, demand will be weaker for both handsets and infrastructure equipment, which is reflected in our worst-case scenario. Tables 1 through 3 provide forecasts for worldwide wireless communications semiconductor revenue. 2003 Gartner, Inc. and/or its Affiliates. All Rights Reserved. 9 December 2003
5 Table 1 Worldwide Wireless Communications Semiconductor Forecast Revenue (Millions of Dollars) 1Q02 2Q02 3Q02 4Q02 2002 Best Case 4,331.3 4,700.5 5,069.7 5,232.8 19,334.2 Most Likely Case 4,331.3 4,700.5 5,069.7 5,232.8 19,334.2 Worst Case 4,331.3 4,700.5 5,069.7 5,232.8 19,334.2 1Q03 2Q03 3Q03 4Q03 2003 Best Case 4,909.0 5,417.8 5,905.8 6,577.7 22,810.3 Most Likely Case 4,909.0 5,417.8 5,905.8 6,170.5 22,403.1 Worst Case 4,909.0 5,417.8 5,905.8 5,948.4 22,180.9 1Q04 2Q04 3Q04 4Q04 2004 Best Case 6,598.3 7,167.5 7,788.3 8,185.1 29,739.3 Most Likely Case 6,189.8 6,839.3 7,488.8 7,870.3 28,388.1 Worst Case 5,261.3 5,676.6 5,991.0 5,981.4 22,910.3 1Q05 2Q05 3Q05 4Q05 2005 Best Case 7,687.1 8,534.2 9,407.0 9,961.9 35,590.2 Most Likely Case 7,391.4 8,166.7 8,942.0 9,398.0 33,898.2 Worst Case 7,021.9 7,350.1 7,690.2 7,800.3 29,862.4 Source: Gartner Dataquest (November 2003) Table 2 Worldwide Wireless Communications Semiconductor Forecast Revenue, Sequential Growth (Percent) 1Q02 2Q02 3Q02 4Q02 2002 Best Case -5.6 8.5 7.9 3.2 7.4 Most Likely Case -5.6 8.5 7.9 3.2 7.4 Worst Case -5.6 8.5 7.9 3.2 7.4 1Q03 2Q03 3Q03 4Q03 2003 Best Case -6.2 10.4 9.0 11.4 18.0 Most Likely Case -6.2 10.4 9.0 4.5 15.9 Worst Case -6.2 10.4 9.0 0.7 8.3 1Q04 2Q04 3Q04 4Q04 2004 Best Case 0.3 8.6 8.7 5.1 30.4 Most Likely Case 0.3 10.5 9.5 5.1 26.7 Worst Case -11.6 7.9 5.5-0.2 3.3 1Q05 2Q05 3Q05 4Q05 2005 Best Case -6.1 11.0 10.2 5.9 19.7 Most Likely Case -6.1 10.5 9.5 5.1 19.4 Worst Case 23.6 4.7 4.6 1.4 30.3 Source: Gartner Dataquest (November 2003) 2003 Gartner, Inc. and/or its Affiliates. All Rights Reserved. 9 December 2003
6 4Q03 Update: Wireless Communications Semiconductor Forecast, 2003-2005 Table 3 Worldwide Wireless Communications Semiconductor Forecast Revenue, Year-Over-Year Growth (Percent) 1Q02 2Q02 3Q02 4Q02 2002 Best Case -8.7 8.0 17.3 14.0 7.4 Most Likely Case -8.7 8.0 17.3 14.0 7.4 Worst Case -8.7 8.0 17.3 14.0 7.4 1Q03 2Q03 3Q03 4Q03 2003 Best Case 13.3 15.3 16.5 25.7 18.0 Most Likely Case 13.3 15.3 16.5 17.9 15.9 Worst Case 13.3 15.3 16.5 13.7 8.3 1Q04 2Q04 3Q04 4Q04 2004 Best Case 34.4 32.3 31.9 24.4 30.4 Most Likely Case 26.1 26.2 26.8 27.5 26.7 Worst Case 7.2 4.8 1.4 0.6 3.3 1Q05 2Q05 3Q05 4Q05 2005 Best Case 16.5 19.1 20.8 21.7 19.7 Most Likely Case 19.4 19.4 19.4 19.4 19.4 Worst Case 33.5 29.5 28.4 30.4 30.3 Source: Gartner Dataquest (November 2003) Gartner Dataquest Perspective Digital Cellular/Personal Communications Services Handsets The handset market is still growing. Suppliers of semiconductor components for use in mobile terminals for cellular and personal communication services networks saw higher-than-expected demand during 2003. The trend for higher sales is likely to continue. Despite the setback earlier in the year because of the effects of severe acute respiratory syndrome in Asia/Pacific, our long-term outlook remains positive. From a regional perspective, Asia/Pacific continues to be the world's largest producer of digital mobile terminals. Companies have moved their production there to benefit from lower manufacturing costs and growing demand from its new subscribers in the region. The price of semiconductor devices for use in 2G and 2.5G terminals will fall during the next three years, but this will be offset by the greater memory and application processing needs of the enhanced phone. The enhanced phone represents the majority of phones sold as replacements in Western Europe, Japan and the United States. 2003 Gartner, Inc. and/or its Affiliates. All Rights Reserved. 9 December 2003
As well as the expansion seen in the market, the design of the handset is undergoing fundamental change to meet the needs of data-capable services. 3G handsets' more complex radio specification and operators' need to offer games and business applications are shaping the specification of semiconductor components. Semiconductor vendors need to be aware of this trend and plan for increasing volume and rapid changes in phone specifications. Mobile Infrastructure As the slow market for mobile infrastructure equipment continues, the pressure mounts for renewed investment in building out the infrastructure, particularly for next-generation services. Gartner Dataquest therefore projects strong demand for mobile infrastructure equipment in 2004. The main opportunities for semiconductor manufacturers are in the baseband and power amplifier segments of the base station. These contain large quantities of high-value microwave power transistor, digital signal processor and application-specific integrated circuit/application-specific standard products components. Gartner Dataquest Recommendations We recommend the following strategies and approaches: The wireless semiconductor industry has entered a period of consolidation. As the growth in the handset market slowed, competition increased, and marginal players' profits are being squeezed. Major players (the top three to five) need to focus on solidifying their market positions by strengthening relationships with their major customers and expanding their business to the next tier of customers by developing a system solution strategy. One opportunity that leaders should continue to consider is the acquisition of startups with compelling technical solutions that would help them expand into new sockets in target systems. Suppliers of innovative transceiver solutions represent good targets because these functions are likely to be integrated into the baseband processor in future low-cost chipsets. Lower-ranked suppliers face challenges that are becoming more critical at this stage. System-based strategies are requiring a significantly greater investment as 3G technology begins to replace 2G/2.5G. This needed investment will stretch the resources of smaller players. They must consider mergers or alliances that will allow them to be contenders in this increasingly competitive market. 7 2003 Gartner, Inc. and/or its Affiliates. All Rights Reserved. 9 December 2003
8 4Q03 Update: Wireless Communications Semiconductor Forecast, 2003-2005 Suppliers of radio frequency components must seek a path to profitability. Prices in this market are dropping as fast as or faster than costs can be reduced. At the same time, companies are innovating rapidly, particularly in the area of transceiver design. Companies need to find a way to add value. Module solutions that incorporate active and passive components into a system-in-a-package product provide a means to increase revenue per unit. Developing or discovering a packaging technology that permits very low cost production of such devices is critical. A second step would be to acquire a complementary supplier of key passive components, such as filters. Companies that can successfully implement such a strategy could offer unique semiconductor-based solutions for mobile handsets. Key Issue What is the size and projected growth of the key application market segments? This document has been published to the following Marketplace codes: SEMC-WW-DP-0352 HARD-WW-DP-0595 For More Information... In North America and Latin America: +1-203-316-1111 In Europe, the Middle East and Africa: +44-1784-268819 In Asia/Pacific: +61-7-3405-2582 In Japan: +81-3-3481-3670 Worldwide via gartner.com: www.gartner.com Entire contents 2003 Gartner, Inc. and/or its Affiliates. All rights reserved. Reproduction of this publication in any form without prior written permission is forbidden. The information contained herein has been obtained from sources believed to be reliable. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of such information. Gartner shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof. The reader assumes sole responsibility for the selection of these materials to achieve its intended results. The opinions expressed herein are subject to change without notice. 118680