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®

Outline Metrics Global outlook Semiconductor outlook Risks MSI outlook Wafer fab equipment/capacity Risks

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

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 (5G, AI, mobile and computing devices)

Accelerating: Growth Gets Stronger Than Past Five Years Cyclical Upswing Accelerating: Growth Gets Stronger Than Past Five Years

Accelerating: Growth Gets Stronger Than Past Five Years Cyclical Upswing Accelerating: Growth Gets Stronger Than Past Five Years

Accelerating: Growth Gets Stronger Than Past Five Years Cyclical Upswing Accelerating: Growth Gets Stronger Than Past Five Years

Consumption roughly 60% of real GDP Cyclical Upswing Consumption Strengthened in 2017 Little downside risk in consumer outlook in the current upswing Consumption roughly 60% of real GDP

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

Consumer Confidence Indexes Are High US – Japan – Germany - China

Oil Prices

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 1.9 Taiwan (0.3) 0.6 1.3 1.2 Germany 0.2 1.8 1.7 France 0.0 1.5 Italy 0.1 UK 2.7 2.6 2.2 US 2.1 2.4 Hilltop Economics, Based on Consensus Forecasts, March 18 Sign of stronger demand + tighter supply Businesses have a chance to get price increases

Global Investment Out of a Cycle Low in 2016 Cyclical Upswing Global Investment Out of a Cycle Low in 2016 This key component of final demand (real GDP) begins to improve in 2017 with tighter output gap, less uncertainty, and modestly stronger real GDP Investment Roughly 1/4 of GDP Demand

Investment Positive: A Key Cycle Driver 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)

Potential Real GDP: Growth in Labor * Capital * Productivity 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

Output Gaps Closed U.S. Output Gap

Output Gaps Closed U.S. Output Gap

Output Gaps Closed U.S. Output Gap Output “Gaps”

The US (global) Economy NEEDS Investment Output Gaps Closed The US (global) Economy NEEDS Investment

The US (global) Economy NEEDS Investment Output Gaps Closed The US (global) Economy NEEDS Investment

Global Economic Slack Almost Gone by 2017 Output Gaps Closed Global Economic Slack Almost Gone by 2017

Consensus: Profits Healthy in 2018, Slip a Little in 2019

Economic Policy Uncertainty Peaked Late 2016 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.

Economic Policy Uncertainty Peaked Late 2016 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.

Trade Conflicts Show in US & China March Data Risk Aversion Lower Trade Conflicts Show in US & China March Data

Trade Conflicts Show in US & China March Data Risk Aversion Lower Trade Conflicts Show in US & China March Data

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)

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

Healthy Economy: Healthy Semiconductors MSI Demand Outlook Healthy Economy: Healthy Semiconductors

Healthy Investment, Healthy Semiconductors MSI Demand Outlook Healthy Investment, Healthy Semiconductors

Stable PC Outlook, Minimal Growth MSI Demand Outlook Stable PC Outlook, Minimal Growth

Servers, Smartphones: MSI Drivers MSI Demand Outlook Servers, Smartphones: MSI Drivers

Healthy Final Demand Outlook Drives MSI MSI Demand Outlook Healthy Final Demand Outlook Drives MSI

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 (In Jan 17) (As of Jan 18) 2018 (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) 22.0 8.0 15.0 IHS Markit (Jan 18) 4.8 21.7 7.4 Semi Intelligence (Feb 18) 10.0 12.0 Semico (Jan 18) VLSI (Jan 18) 7.7 WSTS (Feb 18) 20.6 4.3 7.0 9.5 Consensus (Average): 6.1 21.6 actual 9.0 11.5 Range/Standard Dev: 7.7/2.8 2.3/0.8 12.3/4.9 10.1/3.3 13.8/5.0

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 (In Jan 17) (As of Jan 18) 2018 (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) 22.0 8.0 15.0 IHS Markit (Jan 18) 4.8 21.7 7.4 Semi Intelligence (Feb 18) 10.0 12.0 Semico (Jan 18) VLSI (Jan 18) 7.7 WSTS (Feb 18) 20.6 4.3 7.0 9.5 Consensus (Average): 6.1 21.6 actual 9.0 11.5 Range/Standard Dev: 7.7/2.8 2.3/0.8 12.3/4.9 10.1/3.3 13.8/5.0

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 (In Jan 17) (As of Jan 18) 2018 (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) 22.0 8.0 15.0 IHS Markit (Jan 18) 4.8 21.7 7.4 Semi Intelligence (Feb 18) 10.0 12.0 Semico (Jan 18) VLSI (Jan 18) 7.7 WSTS (Feb 18) 20.6 4.3 7.0 9.5 Consensus (Average): 6.1 21.6 actual 9.0 11.5 Range/Standard Dev: 7.7/2.8 2.3/0.8 12.3/4.9 10.1/3.3 13.8/5.0

No hints of a turn, yet Equipment Billings Continue to Set New Record Levels False peak in July ‘17 on a seasonally-adjusted basis

No hints of a turn, yet Equipment Billings Continue to Set New Record Levels False peak in July ‘17 on a seasonally-adjusted basis

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 IHS Markit (All, at ISS 2018) +5 SEMI (All Equipment) +38 +9 VLSI (WFE at ISS 2018) “Consensus” +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

Long-run Demand VS Capacity Forecasts (Annual Models)

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 19th Party Congress (geopolitical, debt, property market bubble, etc.) Political extremism (US & EU) Geopolitical N. Korea, Middle East Global terrorism Oil

Semiconductor Risks Issues in supply chain: 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 – 7nm Inventory questions (mobile devices especially iPhone X?) Overall underinvestment in technology by the rest of the economy (the productivity issue) End of the roadmap

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 World GDP 2.3 3.1 3.2 SEMI MSI 2.9 10.0 6.7 5.2 WFE 9.3 35.8 3.0

Duncan Meldrum Chief Economist Hilltop Economics, LLC duncan Duncan Meldrum Chief Economist Hilltop Economics, LLC duncan.meldrum@hilltopeconomics.com 610.709.7951