Chip industry outlook surprisingly bullish after a boom year in 2010

The chip industry is surprisingly bullish in its outlook for 2011, even though it already enjoyed record results in 2010. Typically, a boom year in the semiconductor industry is followed by a bust.

But leading indicators suggest things won’t be that bad next year, according to a survey by the accounting and consulting firm KPMG. Based on a survey of 118 industry executives, overall confidence is flat at 60 points out of a possible 100 index for the 2011 outlook, compared to 61 a year ago. Having confidence that high in a year after a record year is remarkable, said Gary Matuszak (pictured above), a KPMG partner who presented the results at a breakfast event co-hosted by the Semiconductor Industry Association on Tuesday. By comparison, the confidence index was at a very pessimistic 36 in 2008 in the midst of the recession.

The chip industry is critical to the tech economy, as semiconductor chips are the building blocks of all things electronic. In the U.S., chip makers employ more than 185,000 people and chips are the country’s No. 1 export.

The confidence index measured factors such as expectations for revenue growth, hiring, capital spending, profit growth and research and development spending. In each of those categories, the executives offered positive responses when asked if the industry’s numbers would grow in 2011. This kind of measurement goes deeper than simple revenue growth forecasts offered by the SIA, the chip industry trade group, which expects growth to slow from 32.8 percent in 2010 to 6 percent in 2011.

About 39 percent of executives interviewed said that they expect revenue growth to be above 10 percent in 2011. Some 29 percent said they believed the work force would grow 5 percent or more. Some 37 percent said profits will grow 5 percent or more. About 45 percent said that R&D spending will increase more than 5 percent in 2011. And 63 percent said that capital spending will grow in 2011.

Of course, many of these numbers could be viewed as a glass half empty, or half full. On the half empty side, 53 percent of the executives said the chip industry cycle will hit its peak in the next 12 months.

In terms of categories, growth is expected in industrial and automotive semiconductor markets. Demand in Europe and the U.S. is also relatively strong. But expectations for solar power are down a third, from 32 percent of executives saying it would grow in 2009 to only 21 percent saying it would grow in 2010.

The most important drivers for growth will be wireless handsets, consumer electronics, computing, and industrial equipment. Interest in renewable energy products was relatively low, with 23 percent saying it was very important. The value of chip content in smartphones will go up 7.5 times in the coming years, according to Credit Suisse.

About 36 percent of respondents believe that their intellectual property litigation cases will increase in the next 12 months. Ron Steger (pictured right), a partner in charge of the chip industry practice at KPMG, said, “I think this is the No. 1 issue facing the industry.”

The executives also said they believe that the value of merger and acquisition deals in the chip industry will increase in 2011. Some 24 percent said that valuations will increase by 11 percent or more in 2011, while another 41 percent said valuations will increase by 1 percent to 10 percent in 2011.

John Pitzer, a managing director and chip analyst at Credit Suisse, said that chip stocks will likely have an upside of 40 to 50 percent from current stock valuations. Long-term growth is expected to accelerate for the chip industry, he said.

“On every cyclical metric, things are relatively healthy now,” Pitzer said. “Inventories are not yet back to October, 2008 (pre-recession) levels.”

Brian Toohey, president of the SIA (pictured right), said that the U.S. industry remains healthy with a 51 percent share of the global $226 billion chip market. But he said the industry remains concerned about various policy issues. He said the U.S. needs to create the right incentives for investment by revising its tax policy to be competitive with other nations such as Singapore.

He also said that chip makers are concerned about new rules for measuring greenhouse gas emissions from chip factories. The problem is the Environmental Protection Agency may be slow at issuing permits for new factories as it awaits data from the greenhouse gas measurements. Toohey also said other critical issues include streamlining export controls, investing in technology, and engaging with China on its intellectual property and market access policies.