2014 should be a banner year for semiconductors with revenue forecast to grow 20% or more. Demand is strong despite softness in PCs as consumers shift spending to smart phones and tablets. Meanwhile Things on the Internet and sensors of all kinds will further drive markets and new applications. In chip manufacturing, a lack of capital spending in 2011-12 has stabilized chip prices before shortages appear in late 2014 and 2015.

Smart Things Drive Growth

A year ago everything was turning smart. This year, smart watches were added to the heap of smart grids, meters, phones, cars, buildings, homes, thermostats, appliances, cards and so many other connected, processor-controlled electronic products. The smart watches act as a notification area for the nearby, still-requisite smart phone. So the pager has come back, now attached to the wrist. Some may sense blood pressure or pulse, temperature, or movement as inputs to that smart phone. Ultimately these Things are extending connectivity a little closer to person, possibly more conveniently. Rather than building humanoid robots we may be shifting to mechanizing the human being. One wonders how much augmentation the normal human can tolerate – or afford. Most people were hitting information overload years ago. Satellite TV being fed directly into the brain is probably going too far.

Thing 1 and Thing 2

In 2013, smart devices morphed into the Internet of Things (IoT), an all-inclusive term that tries to push the human to the side, engulfing Machine to Machine (M2M) connectivity and embracing Big Data and centralized computing for the 21st century. All high-tech C-level executives included "IoT" (or some version of it) in their presentations last year.

The IoT is likely to continue as a theme in 2014 but will likely remain a gross concept rather than an implementation blueprint. There are so many standards – agreed means of representing, translating, transmitting, gathering, storing, sifting, and processing data – that need to be established before electronics can be universally connected together. Lately, one can only point to iOS and Android as new de facto standards that might shift the Internet to become an Internet of Things.

But smart phones and tablets are very intelligent human interface devices (much like the PC) not pure autonomous Things. Servers and anything that is The Cloud are more Things, machines intended to perform without human intervention. iOS and Android enabled thousands of apps but such apps are largely proprietary, directing data from and to narrow bands of Things. The app downloaded from Hilton Hotels is not likely to find a bed at Motel 6. The IoT promises to connect every conceivable piece of electronic equipment, Things previously called embedded systems. But it will be a while before industries embrace standards that allow such interconnectivity.

Imagine some day when General Electric appliances, Samsung TVs, the Chevrolet in the garage, ADT security systems, NEST thermostats, and electric utility meters all interact with each other, even when installed by a simple homeowner. There is hope (see Qualcomm’s AllJoyn protocol for the internet of things finds a home in LG TVs) but we industry analysts have heard such promise for decades now, and while occasional pieces fit into the puzzle, the grand puzzle itself gets more intricate with each passing year. Dream out to the ten-year horizon.

Heightened Awareness

There are real advantages to electronic devices not only communicating over the Internet to distant systems but also getting in touch with their local environs. The explosion of sensors to feed location, orientation, movement, tension/stress, pressure, magnetics, and so many other mechanical and chemical data to processors for analysis and incorporation into system activities will also continue to drive much of electronics evolution for the next few years.

Tied with wireless networks, arrays of sensors can cover large areas and be deployed quickly. Sensors, connectivity, and greater information accessibility make it possible to build systems having a much better awareness of their surroundings and to factor in pertinent data that was not previously available.

Support in microcontrollers (MCUs) for sensor inputs and interpretation is seen from almost every vendor now and in the action of mergers like Silicon Labs (analog) with Energy Micro (MCUs). The blending of sensor technology into useful applications is an area that is exploding right now and will continue for at least the next few years as electronics become more aware – and more useful.

Smile

Humans can't seem to get enough visual stimulation, and that stimulates the semiconductor industry. Image sensors have certainly enjoyed high volumes since the early digital still cameras, leading to low prices, which in turn leads to even wider usage. Those cameras have driven up resolution and quality to astonishing levels. Professional digital "SLRs" and convenient digital still cameras remain as viable product categories even though the cameras integrated onto smartphones can be as good as the point-and-shoots.

Microsoft and Nokia brag about 41 megapixels in a smartphone while Sony raves about its total image quality in any light with "just" 13 MP. Once upon a time people would hold up (cigarette) lighter flames to show appreciation at music concerts. Today in almost any gathering, every hand hoists a smartphone or an unwieldy tablet to take pictures and make recordings. Those Things have a lot more semiconductors in them than BIC lighters ever did.

From another angle, rugged cameras like the GoPro allow outdoorsmen, sports participants, and thrill seekers to record their active adventures as they happen, to enjoy later as they reminisce or to advance reality TV programs and stimulate Internet video downloads. On the other hand, SKYPE video returns a real 56K-modem- and third-world quality to modern society. Nobody is saying that Ansel Adams masterpieces are being captured by all these new cameras, and "selfie" may shout "amateur" and "ME" in a whole new way, but the hardware designers have little control of how their equipment gets used.

Radar and similar technologies are making their way to consumer-like products through the automobile for warning, safety, and guidance systems being offered on a greater spectrum of cars. Many of the sensors mentioned employ sophisticated algorithms running on specialized processors to clean up signals, isolate meaningful data, find patterns, and present results in useful ways, whether it's for human consumption on a display or for use by distant Things. This drives the demand for higher performance – and more specialized – processor cores now found on MCUs, general microprocessors (MPUs), applications processors, and Systems-on-a-Chip (SoCs).

On Display

One wonders just how big television screens can get, but with 4K and 8K (those are screen row counts, not (just) prices) creeping onto store shelves we have the chance to find out. Upgrades may be limited with the high prices, without an analog-to-digital cable cut imminent, and with limited ultra-high-res content being available – a problem the 3-D TVs fought.

Tablets seem to have driven a resolution-density challenge with more pixels being squeezed into a fixed dimension, which has carried over to smart phones and cameras as well. While the display glass may not qualify as a semiconductor product, the drivers for these screens and the processing requirements to manage image input resolution, aspect ratio, and compression technology correlated to the output display keep chip manufacturers and programmers on their toes to supply the ever-growing needs.

Applications Drive Demand

More information. Internet and wireless connectivity. A myriad of sensor data. Image sensors. High resolution displays. Large screens (and small screens). More adept processors. Is the Internet of Things starting to drive the electronics industry? It certainly is.

However, consumption is just one part of the semiconductor story. Balancing supply with demand causes notorious boom and bust cycles for the chip industry with its capital-intensive fabs. Of the past dozen semiconductor cycles, very few have been demand driven – rather they come from too much or too little capital spending in prior years.

Supply Shortages Stabilize Pricing

For 2014, Objective Analysis looked carefully at the industry quantitatively from the perspective of capital spending. When capital spending is high, it causes an oversupply and when capital spending is low a shortage results. There is usually a two-year delay between a change in capital spending and a change in the semiconductor market's direction, since it takes this long for the production capacity to ramp to full volume.

In mid-2011, when the last downturn began in earnest, capital spending was dramatically reduced. This has resulted in today's record semiconductor market revenue, since many prices stopped their steep erosion starting as early as 2012. Although capital spending is only just now starting to ramp, new plants have been announced (Samsung & Toshiba are good examples) and other production facilities are being aggressively tooled. Since producers are just now starting to add new capacity, today's budding shortages will not be quelled by increased production capacity for another two years, or until late 2015.

During this kind of shortage, prices tend to increase very little. Semiconductor revenue growth is driven by increased chip consumption at flat prices. Objective Analysis expects for prices to stay flat all through 2014 and 2015. After that, in all likelihood, another oversupply will hit, based on the increase in capital spending that we anticipate for 2014. Prices will collapse, and the market will experience another downturn.

For semiconductors in 2014 this means all arrows are pointing up. It would not be the slightest bit surprising to see 32% growth like the market enjoyed in 2010. However, for the moment Objective Analysis is being more cautious, calling for growth in the 20% range.

Strong Positive Outlook

Overall, Objective Analysis anticipates semiconductor consumption will increase, with promising growth in many new applications offsetting a lackluster PC market. Tight supply through 2015 will lead to stable pricing and strong revenue growth. The Internet of Things and enhanced sensor-based applications will help drive 2014 semiconductor revenues to record levels.