Equipment Spending Growth to Resume in 2009... Maybe
By George Burns, Strategic Marketing Associates
The economic consequences of the current financial crisis should have a negative effect on chip sales for the remainder of the year. Equipment sales have been slumping since 2007 will not see a recovery until 2009. Based on current new fab plans and SEMI’s preliminary numbers for the November 2008 edition of the World Fab Forecast, equipment sales to memory manufacturers, who are responsible for than one-half of equipment sales, should begin increasing their equipment sales by second quarter of next year.
This will result in improving sales beginning in the third quarter of next year. However, given current fab plans, the increase in spending in the second half of 2009, will probably not be enough to make the year one of growth. At best, equipment spending in 2009 will be flat at $30 billion.
Semiconductor sales in the quarter ending this last June have been good but, given the current
economic situation, it would be surprising if they hold up. Second quarter chip sales grew by a healthy 2 percent, only one-half a percent less than the average from 2002 to 2007 (see Figure 1). This is a much better performance than the negative 5 percent posted in Q1. This year's second quarter chip sales were also much stronger than the sales posted in the second quarter last year.
The third quarter is when chip companies post their best sales. In recent years, third quarter gains over the previous quarter have averaged almost 10 percent and last year, chip sales grew by 13 percent in the third quarter.
However, with financial storms bringing down the biggest U.S. financial institutions, it is unlikely that healthy chip sales growth can continue. Chip sales growth will inevitably fall below average for the remainder of this year, at least.
This is not good news for the equipment industry. Equipment sales have shown lackluster growth or have been down for a year now and the 26 percent decline in Q2 of this year (see Figure 2) was the steepest since 2001. A slowdown in chip sales for the remainder of the year is prospect equipment companies cannot afford.
How Long Will the Slowdown Last?
How long this slowdown will last depends on how bad and how long the financial meltdown in the U.S. is, and how well the country's political institutions respond. So far, it's not good. But with the election in November, elected officials will be able to stop campaigning and begin governing.
Based on current plans, however, we do look forward to more new fabs coming online in 2009.
Unfortunately, in an economic situation as uncertain as today's, current plans could very well be postponed.
Last year 33 new fabs came online with a value of more than $45 billion. This year's number of new fabs beginning production will be only 20. Compared to last year, the value of this year's new fabs will be down by 65 percent, to $15 billion (see Figure 3). Next year we expect the value of new fabs coming online will grow to almost $30 billion. The exact timing on next year's fabs is, however, still an open question. If it's toward the end of the year, or if the fab ramps are conservative, then next year's equipment sales and capital spending will be, at best, flat.
It All Depends on Memory
Memory, flash and DRAM now account for more than one-half of all equipment and capital spending (see Figure 4). Last year, DRAM and flash manufacturers' capital spending was more than $35 billion, accounting for almost 60 percent of all spending. This year memory manufacturers are cutting their capital spending by $9.4 billion, 27 percent. By comparison, total capital spending will be down by $12 billion, to $48 billion. In other words, more than three-fourths of this year's fall in capital spending is attributable to memory.
It is interesting to note how memory dependent the industry has become in such a short time. As recently as 2002, memory manufacturers accounted for slightly more than 20 percent of all spending. The jump in memory's share of capital spending is in large measure due the growth of flash memory. In 2007, for example, the value of new flash fabs beginning production exceeded that of DRAM fabs, $17 billion and $15 billion, respectively.
In addition to cutting back on the number of fabs coming online, DRAM and flash manufacturers have also slowed the ramp of the fabs already online, and have actually begun the process of lowering their wafer capacity.
According to SEMI's preliminary data for the November 2008 edition of the World Fab Forecast which forecasts capacity and spending on a fab by fab basis through 2009, memory capacity additions peaked in the third quarter of 2007 (see Figure 5).
Capacity additions fell to roughly 300,000 equivalent 200 mm wafers in Q4 of 2007 and also in Q1 08. In the quarter just ending, Q3, capacity taken off-line and brought online were roughly equal and thus, net capacity additions were zero. SEMI expects DRAM and flash capacity to actually decline in Q4. The lower rate of capacity growth and its actual decline is partly the result of companies either shuttering existing 200 mm fabs or converting them to other non-memory uses.
Next year SEMI expects memory manufacturers to resume adding substantial new capacity, particularly in the second half of the year. If correct, this will lead to increased spending, including that by the all-important DRAM and flash manufacturers.
If all goes according to plan, spending by DRAM and flash companies should stop falling by the first quarter of next year at the $3.4 billion mark (see Figure 6).
In the second half of next year, quarterly memory spending should have grown to near the $5 billion mark. For the year as a whole, total equipment spending in 2009 will be about $30 billion, which will be at best, flat according to the preliminary numbers for the November edition of the SEMI World Fab Forecast.
This is a cautiously optimistic scenario. As many as nine fabs or new fab expansions, costing at least $1 billion, will begin production in 2009. Some of these, such as the new Nanya and Micron joint venture, MeiYa, are fairly certain. Others, such as Powerchip's new DRAM fab, P4, are less certain.
All times and plans have a degree of uncertainty. Because the entire global economy is involved, today's level of uncertainty is higher than it has been in years, if not decades. Still, with a little bit of luck, the fabs planned for next year will actually come online and the industry will began another cycle of growth.
International Wafer Fab News is written and published by Strategic Marketing Associates: