How low can spending go?

By Christian Gregor Dieseldorff, SEMI Industry Research and Statistics (Nov 1, 2008)

Significant changes and events in the world’s economy— changes most did not see coming— have taken place since late summer that have impacted the global semiconductor industry.

The data and forecasts reported in the World Fab Forecast are based on the tracking of fab investments, be it new projects, capacity expansions, or technology upgrades, on a company-by-company and fab-by-fab basis. Its forecasts are based on hard numbers analyzed and reported for these projects.

In October 2007, World Fab Forecast forecasted a 10% decline for 2008 in fab equipment spending, before anyone else forecasted a decline. This was at a time when the economy appeared stable though sluggish, and chip demand, while slowing, looked positive.

Into the summer of this year, prospects for growth in 2009 for semiconductors seemed more positive compared to the current year. As a result, the expectation was for increased capital investments to keep pace with the anticipated growth.

The outlook changed drastically in early September, proving how strongly our industry is tied to the consumer and the health of the world’s economy.

The latest analysis of the World Fab Forecast database (October 17, 2008 Interim report, a special edition published to subscribers) shows a decline in spending in 2009 for fabs equipping (see figure), as some companies have pushed out new and current projects even further into late 2009 or into 2010, or put projects on hold for an indeterminate time.

• Based on SEMI’s current analysis (as end of October 2008), spending on fabs equipping in 2008 is expected to decline about -28%.
• Spending on fabs equipping for 2009 is currently forecasted to decline by at least -15%.
• Spending on fab construction projects will decline by -41% in 2008 and is estimated to decline by at least -11% in 2009.
• After a wafer capacity increase of 18% in 2007, spending cutbacks, project delays, and fab closures are expected to result in a growth of just 6% in 2008 and 3% to 5% in 2009.

"How low can spending go?”

The answer depends on the strength of a company's position and now primarily on its cash reserve in a shaken economy. Mainly due to oversupply, a number of semiconductor companies have been struggling with average selling prices (ASPs) so low that they were not profitable even before the current economic turmoil.

In addition, companies may now experience problems getting credit or finding investors for the next upgrade or expansion they need to keep its market share or even stay in the market. Many companies are dealing with the problem by cutting costs, such as laying off personnel or merging with other company which creates redundancy leading to the same result. Those people are valuable assets for a company, but also play a key role in the economy as consumers.

Over the past number of years since the last Dot-Com bubble burst, the semiconductor industry has become more dependent on the consumer. As unemployment plays out across the economy, the impact on the electronics market will be prominent. For every person laid off, many more are affected; be it family members, vendors, stores, creditors, and banks.

If the current economic outlook remains quite poor, consumers are hesitant to get the latest MP3 player, game console or computer. Slower consumer spending drives electronics demand down further, which cuts revenue and profit margins of companies across the electronics supply chain even more, who then need to react with even more cost-cutting.

An improvement in the outlook for the semiconductor market and its supply chain is dependent on clarity and stabilization of the world’s economy.

The data of the World Fab Forecast (as end of October 2008) indicate that the spending outlook on fabs equipping in 2009 could to get even lower than -15%. Stay tuned for the next World Fab Forecast November 14 edition.

SEMI World Fab Forecast report provides high-level summaries and graphs; in-depth analyses of capital expenditure, capacity, technology and products, down to the detail of each fab; and forecasts for the next 18 months. These tools are invaluable for understanding how 2009 will look, and learning more about capex for construction projects, fab equipping, technology level, and products.

Please visit www.semi.org/fabs for additional information on these reports.

Posted Nov 4, 2008