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Electronics Market OutlookSeptember 2003

September 2003

Agenda

About In-Stat/MDR

Economic Conditions

Demand Drivers & Application Segments

Regional Issues

Semiconductor Industry

September 2003

About In-Stat/MDR

The leading provider of research, assessment and market forecasts of semiconductors and advanced communications equipment and services.

A member of the Reed Electronics Group.

September 2003

Multimedia

Wireless

BroadbandCores of Expertise

Semiconductor Markets & Technology

US Business Segmentation & Verticals

Projections & Outlook

Semiconductor

Consumer & Residential Networking

Service Provider Networks

Business & Residential Networks

September 2003

$-

$20,000

$40,000

2001

Wireless Infrastructure ($M)

$-

$40,000

$80,000

2001

Wireless Handsets ($M)

$-

$15,000

$30,000

$45,000

2001

Wireless Services ($M)

Other

Basic

Voice Services

$-

$20,000

$40,000

2001

US Business Wireless Spending ($M)

Enterprise

Medium

Small

SOHO$-

$10,000

$20,000

2001

Wireless Semiconductors ($M))

Base Stations

Handsets

The Wireless Value Chain

Semiconductor /Services/Content

Client Equipment

InfrastructureTechnology End Users

September 2003

Worldwide GDP Growth

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

1990 1992 1994 1996 1998 2000 2002 2004* 2006*

September 2003

Worldwide Electronics Market

$1,185

$1,356

$1,217 $1,253$1,337

$1,431$1,507

0

2000

4000

6000

8000

10000

12000

14000

16000

1999 2000 2001 2002 2003 2004 2005

(US$ in Billions)

September 2003

8%

46%

31%

15%

Enterprise

Middle Market

Small Businesses

SOHO Businesses

US

$ in

Bill

ion

sDistribution of IT Spending in the US Market

by Size of Business, 2003

200620052004200320022001

$476.7 $492.4

$584.1$564.2

$538.2$512.8

$0.0

$200.0

$400.0

$600.0

IT Spending

US Business Market

September 2003

Noneselected

Putting internalapplications

on Web

Connectingremote or

mobileworkers

Conductingtransactions or

customerservice online

Increasedtelecom orbroadband

requirements

Upgradinginternal

applications

UpgradingLANs

57%54%

41%

20%

29%32%32%

0%

20%

40%

60%

80%

N = 854

% o

f R

esp

on

de

nts

Question: Which factors have significantly impacted your IT

spending in the last 12 months?

58%

14%28% Small Business

Mid-sized Business

Enterprise

Factors Impacting IT SpendingDistribution of Responses by Size of Business

September 2003

Constrained Worldwide Carrier CapEx

• In-Stat/MDR forecasts CapEx decline of 7% in 2003

• Decline primarily due to heavy debt load and weak economy

• Forecasting weak market rebound in 2004, with 2% growth

$310$280

$205$191 $195

$0

$50

$100

$150

$200

$250

$300

$350

2000 2001 2002 2003 2004

US$ Billions

Source: In-Stat/MDR, 05/03

September 2003

IP Services Growing Worldwide

• Worldwide IP Services grow 40% in 2003 and 34% in 2004

• Hosting (Web, Application, Storage) represents largest IP service

• Highest growth IP services are VoIP and IP VPN

$0

$10

$20

$30

$40

$50

$60

2002 2003 2004

Other

Content Delivery

Unified Messaging

IP VPNs

VoIP

Hosting

US$ Billions

Source: In-Stat/MDR, 02/03

September 2003

Computer Market

PC units experiencing single digit CAGR

PC ASP has dropped to about $1,200

Most users have more than enough power

Many users want new features

Business replacement cycle 2H 2003

US- Computers & Related Products Bookings/Billings

(Three Month Average)

0

2000

4000

6000

8000

10000

12000

BO

OK

ING

S A

ND

BIL

LIN

GS

(Millio

ns)

0.80

0.90

1.00

1.10

1.20

1.30

1.40

1.50

1.60

1.70

1.80

1.90

2.00

Bo

ok

to B

ill

Ra

tio

BOOK TO BILL RATIO

SALES

ORDERS

47% of Semiconductor consumption

September 2003

LAN Priorities 2003In Q2 2003, on which, if any, of the following LAN technologies will your budget for LAN equipment and services be spent? (Please select all that apply; n=443)

15%

42%

30%

13%

19%

24%

36%

42%

8%

3%

0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50%

Switches

Security

Storage

Services

NICs

WLAN

LAN telephony

Videoconferencing

Other

None/Don't know

Source: In-Stat/MDR, 3/03

September 2003

Worldwide DSL Growth Remains Strong

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

2002 2003 2004

ROW (MEA, SA)

Asia Pacific

Europe

N. America

Lines in Thousands

Source: In-Stat/MDR, 02/03

• Worldwide DSL subs grow 47% in 2003 and 37% in 2004

• S. Korea has highest installed lines in Asia, but growth favors China and Japan

• US still lags rest of the world in growth due to regulatory uncertainty

September 2003

Worldwide Wireless Market UpdateMajor demand drivers:

Mobile communications & the Internet The combination will be the major driver for this decade.

More than $100B spent for 3G licenses. Billions more required for infrastructure hardware.

Mobile text messaging is truly a “Killer App,” with over 100 million messages per day being sent. Western Europe closed 2002: 77.2% penetration, AND 7.2% annual growth! AsiaPac has 13% penetration and 31.5% annual growth rate.

China 206.6M subscribers end 2002. Fourth quarter growth was almost 6.7 million net new adds.

India next major growth market, 1% penetration and 91% annual growth rate. (700k new subscribers / quarter!)

September 2003

Hot Spots & WLAN

0

50

100

150

200

250

2002 2003 2004 2005 2006 2007

Lo

ca

tio

ns

(K

) &

Co

nn

ec

ts (

M)

Aggregate Worldwide Deployments (K)

Worldwide Connects/Year (M)

September 2003

(All Revenue in US$M) 2001 2002 2003 2004 2005 2006Total WLAN Chipsets Revenue

Total All Chipsets $229.9 $403.9 $421.7 $527.4 $575.2 $566.8% Change 75.7% 4.4% 25.1% 9.1% -1.5%

Total Cellular Base Station Chipsets Revenue

Total All Chipsets $2,587 $2,483 $2,161 $2,044 $1,698 $1,414% Change -4.0% -13.0% -5.4% -16.9% -16.7%

Total Handset Chipsets Revenue

Total All Chipsets $19,975 $19,948 $18,491 $19,169 $18,890 $18,464% Change -0.1% -7.3% 3.7% -1.5% -2.2%

Component manufacturers continue to embrace cellular technology and 802.11. Intel major push via “Centrino” family, supported by $300 million advertising spend over 3 months.In 2000, 4 companies making WLAN chipsets; 2003, more than 35 25, while ASPs dropped from ~$30 to ~$6.

Worldwide Wireless ChipsetsSource: In-Stat/MDR

September 2003

State of Consumer Equipment• Growing Opportunities

• DVI/HDMI-enabled devices: over 200% CAGR 2002 – 2006

• Digital Imaging: image sensor market growing over 23% per year through 2006, with cameras in mobile phones driving the market

• USB-enabled devices to rise 18% CAGR through 2007

• Integrated DTV sets will grow 61% CAGR due to FCC mandate

• PVR unit shipments to double in 2003 to 3M units, then again double in 2004

• PDAs to see 18% CAGR 2002-2007, strategies to grow market include device variety, pricing, multimedia, and connectivity

September 2003

State of Consumer Equipment• Slowing/Declining Segments

• DVD growth has slowed as market matures

• Smart Displays slow getting off the ground in 2003 – too expensive

• Smart appliances, although appearing in greater numbers, will have slow adoption due to pricing, broadband and home networking penetration rates

• Decline in maturing DBS set top box market; stability for digital cable set top boxes

• Nascent Markets

• Network-ready DVD Players will begin to appear in late 2003, portend a huge market for consumers with broadband Internet services, especially those with Cable Modem or DSL service to their networked home PC

September 2003

Consumer Product Growth

-

50

100

150

200

250

2001 2002 2003 2004 2005 2006

Video GameConsolesDVD Players &Recorders

PVRs (Stand-Alone)

DTT STBs

IP/DSL STBs

DBS STBs

Cable STBs

M Units

Source: In-Stat/MDR, 6/03

September 2003

Home Networking/Digital Domicile

$-

$1,000,000

$2,000,000

$3,000,000

$4,000,000

$5,000,000

$6,000,000

2002 2003 2004 2005 2006 2007

Worldwide Home Networking Revenues by Product Segment (US$K)

Includes: Media Networks, Residential Gateways, Infrastructure, NICs/LOM

September 2003

Other Markets

Automotive Steady end product unit volumes Increased electronic content Only 7% of total semiconductor market

Industrial & Military Under 10% of total semiconductor market Declining, with some recent stabilization Highly fragmented

September 2003

Semiconductor Markets

No new killer apps, no new $XX billion semi markets. 1970s - Mainframe 1980s - Mini Computer early 1990s - PC / Web late 1990s - Mobile Phone / Communications 2000s - ?????

Recovery will depend on a wide range of end products.

September 2003

Regional GDP Growth

-4%

-2%

0%

2%

4%

6%

8%

10%

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003*2004*

United States European Union Japan

Asian Tigers Asia Developing

September 2003

Semiconductors - Consumption

% of Semiconductor Sales by Region

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

1Q1984 1Q1986 1Q1988 1Q1990 1Q1992 1Q1994 1Q1996 1Q1998 1Q2000 1Q2002

Americas Europe Japan Asia Pacific

September 2003

Regional Shifts

Americas, once first is now last as end product manufacture moved from US (and Mexico) to China.

Western Europe expected to decline next, but more slowly due to social structure.

Long term SARS impact? Too soon to tell

Everything moves toward the lowest cost

September 2003

Semiconductor Revenue

Quarterly Semiconductor Revenue (US$ in Billions)

0

10

20

30

40

50

60

1Q1996 1Q1997 1Q1998 1Q1999 1Q2000 1Q2001 1Q2002 1Q2003

Source: WSTS, In-Stat/ MDR

September 2003

Semiconductor Unit ShipmentsQuarterly Semiconductor Shipments (Billions of Units)

0

20

40

60

80

100

120

1Q1996 1Q1997 1Q1998 1Q1999 1Q2000 1Q2001 1Q2002 1Q2003

Source: WSTS, In-Stat/ MDR

September 2003

Semiconductor ASPQuarterly Semiconductor ASP

$0.00

$0.10

$0.20

$0.30

$0.40

$0.50

$0.60

$0.70

$0.80

1Q1996 1Q1997 1Q1998 1Q1999 1Q2000 1Q2001 1Q2002 1Q2003

Source: WSTS, In-Stat/ MDR

September 2003

Since the Crash -

Unit shipments have grown from their pre run-up levels

Average Selling Price has further declined

Revenue has returned to pre 1999 levels

The primary cause of today’s semiconductor revenue problem is NOT demand, it is over-capacity

September 2003

Capacity Outlook

Commoditization of the CMOS process

Speculative foundry fab building to capture market share

Commoditization of the design process has also begun - ODMs

DRAM revenue peaked at $40B in 1995 and was $16B in 2002. Revenue now tracks ASP.

What happens to commodities?

September 2003

Implications for Semis overall

Demand will continue to increase, although the rate of growth may slow. Price will become more volatile as semi industry becomes more commoditized and over-capacity becomes more prevalentRevenue will increase, but slowly, and with more short term perturbationsProfitability will decline

September 2003

Semiconductor Forecast

0

50

100

150

200

250

300

350

400

450

500

1998 1999 2000 2001 2002 2003* 2004* 2005* 2006* 2007*

Rev

enue

& U

nits

(Billion

s)

.

$0.00

$0.10

$0.20

$0.30

$0.40

$0.50

$0.60

Agg

rega

te A

SP (U

S $

)

Total Revenue Total Units ASP

September 2003

Summary

Worldwide economy remains uncertain, but 2H 2003 remains poised for stronger growth.

In the Electronics and Semiconductor Industries, prices are under strong downward pressures which is limiting revenue growth despite respectable growth in unit shipments.

Consumer products, Handsets, and select LAN products are showing the strongest growth.

Telecommunications infrastructure capex remains weak through 2003 and 2004.

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