Global Economy Outlook A Healthy Backdrop for Semiconductors

Global Economy Outlook*: A Healthy Backdrop for Semiconductors Business of Cleans April 9, 2018 Duncan Meldrum Chief Economist, Hilltop Economics, LLC duncan. meldrum@hilltopeconomics. com 610 -709 -7951 *A global outlook based on Consensus Economics, Inc. CONSENSUS FORECASTS® Duncan Meldrum Business of Cleans April 9, 2018 1

Outline • Metrics • Global outlook • Semiconductor outlook – MSI outlook – Wafer fab equipment/capacity • Risks Duncan Meldrum Business of Cleans April 9, 2018 2

Metrics • Real GDP: Gross Domestic Product (final demand for goods and services, in the largest 85 countries measured in Billions of 2010 US$ - that is, inflation removed, so a “real” or “volume” measure) – Real consumer spending (for key 45 countries) – Real business investment (for key 45 countries) • Million Square Inches (MSI) of silicon wafers shipped to semiconductor manufacturers (Source: SEMI. ORG) • WSTS semiconductor revenue (World Semiconductor Trade Statistics) - $000 sales by major region reported by WSTS. ORG • Semiconductor Equipment Billings (~90% of worldwide semiconductor equipment sales) – Reported for North America by SEMI. ORG – Reported for Japan by SEAJ. ORG Duncan Meldrum Business of Cleans April 9, 2018 3

Summary Overview: 2018 -19 • In the accelerating phase of the economic cycle – – – Healthy consumer Investment upsurge driving the global economy stronger Slightly higher inflation, diverging interest rates Currency unsettled Potential for much higher economic policy uncertainty: trade, geopolitics the current wild cards • Healthy backdrop for semiconductor industry: – Demand for semiconductors grows above trend – Wafer Fab Equipment investment strong – Risks: excess capacity expansion, supply chain imbalances (wafers? ) and final demand uncertainty (5 G, AI, mobile and computing devices) Duncan Meldrum Business of Cleans April 9, 2018 4

Cyclical Upswing Accelerating: Growth Gets Stronger Than Past Five Years Duncan Meldrum Business of Cleans April 9, 2018 5

Cyclical Upswing Accelerating: Growth Gets Stronger Than Past Five Years Duncan Meldrum Business of Cleans April 9, 2018 6

Cyclical Upswing Accelerating: Growth Gets Stronger Than Past Five Years Duncan Meldrum Business of Cleans April 9, 2018 7

Cyclical Upswing Consumption Strengthened in 2017 Little downside risk in consumer outlook in the current upswing Duncan Meldrum Business of Cleans April 9, 2018 Consumption roughly 60% of real GDP 8

Global Consumer Outlook Economies are growing Unemployment rates are coming down Wages are at least stable Inflation is low Oil prices are not a big problem Consumer debt is under control Risks (interest rates, trade wars, policy) are not of immediate concern to consumers • Confidence is high • • Duncan Meldrum Business of Cleans April 9, 2018 9

Consumer Confidence Indexes Are High US – Japan – Germany - China Duncan Meldrum Business of Cleans April 9, 2018 10

Oil Prices Duncan Meldrum Business of Cleans April 9, 2018 11

CPI Inflation Higher, But Not a Problem CPI % Change 2015 2016 2017 2018 2019 China 1. 4 2. 0 1. 6 2. 3 Japan 0. 8 (0. 1) 0. 5 1. 0 1. 1 South Korea 0. 7 1. 0 1. 9 (0. 3) 1. 4 0. 6 1. 3 1. 2 Germany 0. 2 0. 5 1. 8 1. 7 1. 8 France 0. 0 0. 2 1. 0 1. 4 1. 5 Italy 0. 1 (0. 1) 1. 2 1. 1 1. 3 UK 0. 0 0. 7 2. 6 2. 2 US 0. 1 1. 3 2. 1 2. 4 2. 1 Taiwan Hilltop Economics, Based on Consensus Forecasts, March 18 Duncan Meldrum Business of Cleans April 9, 2018 Sign of stronger demand + tighter supply Businesses have a chance to get price increases 12

Cyclical Upswing Global Investment Out of a Cycle Low in 2016 Duncan Meldrum Business of Cleans April 9, 2018 Investment Roughly 1/4 of GDP Demand 13

Cyclical Upswing Investment Positive: A Key Cycle Driver • Revenue growth more assured – Real GDP growth (volume) keeps looking a little stronger, now at 3. 2% – Some inflation (price) on average from ~0 to 1% to ~1% - 2% – “Revenue” now ~5% • Output gaps closed, need capital to grow • Profitability still positive – Productivity-related investment needed – Tax law changes, at least in U. S. , positive for investment (at the margin) • Risk aversion declined – – Consumer attitudes back to normal Small business attitudes finally recovered Chasing the data UP- improving more than expected in earlier forecasts Economic policy uncertainty down (even with trade) Duncan Meldrum Business of Cleans April 9, 2018 14

Output Gaps Closed Potential Real GDP: Growth in Labor * Capital * Productivity • Labor force – Number of People times Participation Rate • Capital – Installed capital plus investment minus economically depreciated capital • Productivity – How well the institutional framework (legal, social, political, economic structure) puts Capital and Labor together Duncan Meldrum Business of Cleans April 9, 2018 15

Output Gaps Closed U. S. Output Gap Duncan Meldrum Business of Cleans April 9, 2018 16

Output Gaps Closed U. S. Output Gap Duncan Meldrum Business of Cleans April 9, 2018 17

Output Gaps Closed U. S. Output Gap Output “Gaps” Duncan Meldrum Business of Cleans April 9, 2018 18

Output Gaps Closed The US (global) Economy NEEDS Investment Duncan Meldrum Business of Cleans April 9, 2018 19

Output Gaps Closed The US (global) Economy NEEDS Investment Duncan Meldrum Business of Cleans April 9, 2018 20

Output Gaps Closed Global Economic Slack Almost Gone by 2017 Duncan Meldrum Business of Cleans April 9, 2018 21

Profits Healthy Consensus: Profits Healthy in 2018, Slip a Little in 2019 Duncan Meldrum Business of Cleans April 9, 2018 22

Risk Aversion Lower Economic Policy Uncertainty Peaked Late 2016 The impact of uncertainty in the model began to lessen in late 2016: evidence the financial crisis impact on investment may have begun to fade. Duncan Meldrum Business of Cleans April 9, 2018 23

Risk Aversion Lower Economic Policy Uncertainty Peaked Late 2016 The impact of uncertainty in the model began to lessen in late 2016: evidence the financial crisis impact on investment may have begun to fade. Duncan Meldrum Business of Cleans April 9, 2018 24

Risk Aversion Lower Trade Conflicts Show in US & China March Data Duncan Meldrum Business of Cleans April 9, 2018 25

Risk Aversion Lower Trade Conflicts Show in US & China March Data Duncan Meldrum Business of Cleans April 9, 2018 26

Risk Aversion Lower Source: NFIB (Mar 2018) – small businesses turned sharply optimistic after Trump elected. Part of the improvement in investment outlook traces to a change in the willingness of these U. S. businesses to invest (50% of the economy) Duncan Meldrum Business of Cleans April 9, 2018 27

Risk Aversion Lower Improved Economy: Rising Interest Rates A sign that we are finally moving back to “normal” Duncan Meldrum Business of Cleans April 9, 2018 Sign of optimism: stronger demand + tighter supply Not too high to dampen investment (through 18) 28

MSI Demand Outlook Healthy Economy: Healthy Semiconductors Duncan Meldrum Business of Cleans April 9, 2018 29

MSI Demand Outlook Healthy Investment, Healthy Semiconductors Duncan Meldrum Business of Cleans April 9, 2018 30

MSI Demand Outlook Stable PC Outlook, Minimal Growth Duncan Meldrum Business of Cleans April 9, 2018 31

MSI Demand Outlook Servers, Smartphones: MSI Drivers Duncan Meldrum Business of Cleans April 9, 2018 32

MSI Demand Outlook Healthy Final Demand Outlook Drives MSI Duncan Meldrum Business of Cleans April 9, 2018 33

Revenue Forecasts Still Chasing the Data UP 2017 -2018 Semiconductor Sales Forecasts Chased data up in 2017; consensus rises for 2018, but wide range now Forecaster (Date Made): 2017 2018 (In Jan 17) (As of Jan 18) (In Oct 17) (In Jan 18) (As of Mar 18) Cowan LRA (Mar 18) 4. 4 20. 8 3. 3 5. 9 16. 4 Future Horizons (Feb 18) 11. 0 20. 0 16. 0 21. 0 Gartner (Jan 18) 7. 2 22. 2 4. 0 7. 5 IC Insights (Mar 18) 4. 0 22. 0 8. 0 15. 0 IHS Markit (Jan 18) 4. 8 21. 7 7. 4 Semi Intelligence (Feb 18) 8. 0 21. 0 12. 0 7. 2 7. 7 10. 0 Semico (Jan 18) 21. 0 VLSI (Jan 18) WSTS (Feb 18) 3. 3 20. 6 4. 3 7. 0 9. 5 Consensus (Average): 6. 1 21. 6 actual 7. 5 9. 0 11. 5 7. 7/2. 8 2. 3/0. 8 12. 3/4. 9 10. 1/3. 3 13. 8/5. 0 Range/Standard Dev: Duncan Meldrum Business of Cleans April 9, 2018 34

Revenue Forecasts Still Chasing the Data UP 2017 -2018 Semiconductor Sales Forecasts Chased data up in 2017; consensus rises for 2018, but wide range now Forecaster (Date Made): 2017 2018 (In Jan 17) (As of Jan 18) (In Oct 17) (In Jan 18) (As of Mar 18) Cowan LRA (Mar 18) 4. 4 20. 8 3. 3 5. 9 16. 4 Future Horizons (Feb 18) 11. 0 20. 0 16. 0 21. 0 Gartner (Jan 18) 7. 2 22. 2 4. 0 7. 5 IC Insights (Mar 18) 4. 0 22. 0 8. 0 15. 0 IHS Markit (Jan 18) 4. 8 21. 7 7. 4 Semi Intelligence (Feb 18) 8. 0 21. 0 12. 0 7. 2 7. 7 10. 0 Semico (Jan 18) 21. 0 VLSI (Jan 18) WSTS (Feb 18) 3. 3 20. 6 4. 3 7. 0 9. 5 Consensus (Average): 6. 1 21. 6 actual 7. 5 9. 0 11. 5 7. 7/2. 8 2. 3/0. 8 12. 3/4. 9 10. 1/3. 3 13. 8/5. 0 Range/Standard Dev: Duncan Meldrum Business of Cleans April 9, 2018 35

Revenue Forecasts Still Chasing the Data UP 2017 -2018 Semiconductor Sales Forecasts Chased data up in 2017; consensus rises for 2018, but wider range now Forecaster (Date Made): 2017 2018 (In Jan 17) (As of Jan 18) (In Oct 17) (In Jan 18) (As of Mar 18) Cowan LRA (Mar 18) 4. 4 20. 8 3. 3 5. 9 16. 4 Future Horizons (Feb 18) 11. 0 20. 0 16. 0 21. 0 Gartner (Jan 18) 7. 2 22. 2 4. 0 7. 5 IC Insights (Mar 18) 4. 0 22. 0 8. 0 15. 0 IHS Markit (Jan 18) 4. 8 21. 7 7. 4 Semi Intelligence (Feb 18) 8. 0 21. 0 12. 0 7. 2 7. 7 10. 0 Semico (Jan 18) 21. 0 VLSI (Jan 18) WSTS (Feb 18) 3. 3 20. 6 4. 3 7. 0 9. 5 Consensus (Average): 6. 1 21. 6 actual 7. 5 9. 0 11. 5 7. 7/2. 8 2. 3/0. 8 12. 3/4. 9 10. 1/3. 3 13. 8/5. 0 Range/Standard Dev: Duncan Meldrum Business of Cleans April 9, 2018 36

No hints of a turn, yet Equipment Billings Continue to Set New Record Levels False peak in July ‘ 17 on a seasonally-adjusted basis Duncan Meldrum Business of Cleans April 9, 2018 37

No hints of a turn, yet Equipment Billings Continue to Set New Record Levels False peak in July ‘ 17 on a seasonally-adjusted basis Duncan Meldrum Business of Cleans April 9, 2018 38

Total Equipment Spend Outlook Comparison Hilltop Econ estimates based on public sources of information Percent Change / Forecaster: 2017 2018 2019 2020 2021 Annual (Japan & NA Eqpt)* +36 +20 +7 -3 -17 Hilltop Econ (NA Equipt) +41 +12 -2 +1 Gartner (at ISS 2018) +32 -3 IHS Markit (All, at ISS 2018) SEMI (All Equipment) +5 +38 VLSI (WFE at ISS 2018) “Consensus” +9 +5 +20 +38 +10 +3 (-) *Hilltop Economic Japan & NA Equipment annual model: A function of MSI, capacity utilization and the yen-$ exchange rate in a simple dlog equation Duncan Meldrum Business of Cleans April 9, 2018 39

Long-run Demand VS Capacity Forecasts (Annual Models) Duncan Meldrum Business of Cleans April 9, 2018 40

Risks Economy Risks One positive, many negative • Forecasters under-anticipate business investment and consumer spending: actual data is better than the expectation • Global trade protectionism • Differential global monetary policy – Interest rates (U. S. tightens as others still easing/loose) – Currency & financial asset turmoil – U. S. yield curve flattening • China post 19 th Party Congress (geopolitical, debt, property market bubble, etc. ) • Political extremism (US & EU) • Geopolitical – N. Korea, Middle East – Global terrorism • Oil Duncan Meldrum Business of Cleans April 9, 2018 41

Risks Semiconductor Risks • China • Trade • Industry Upswing leading global – Likely to turn down before global – CONCERN: Momentum has turned • Issues in supply chain: – Selected areas of underinvestment, eg wafers – Uncertainty about speed new manufacturing processes can come online – 7 nm – Inventory questions (mobile devices especially i. Phone X? ) • Overall underinvestment in technology by the rest of the economy (the productivity issue) • End of the roadmap Duncan Meldrum Business of Cleans April 9, 2018 42

Cyclical Upswing Summary – 2017 -19 • The world economy has moved into an accelerating phase of the business cycle. • Semi MSI growth peaked in 2017, remains above trend in 2018 & 2019 on strong investment-related demand. • Semiconductor revenue forecasts are chasing actual data up – watch for an adjustment downward later this year. • Semi equipment demand momentum booming through 2017, healthy growth in 2018, flattens in 2019 • Growth Rates: 2016 2017 2018 2019 Duncan Meldrum Business of Cleans April 9, 2018 World GDP 2. 3 3. 1 3. 2 3. 1 SEMI MSI 2. 9 10. 0 6. 7 5. 2 WFE 9. 3 35. 8 10. 0 3. 0 43

Duncan Meldrum Chief Economist Hilltop Economics, LLC duncan. meldrum@hilltopeconomics. com 610. 709. 7951 Duncan Meldrum Business of Cleans April 9, 2018 44