"Tough Go" until 2010

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“Tough Go” until 2010

By George Burns, Strategic Marketing Associates

Economic Crisis and Chip Sales

The worst recession since the Great Depression is now well underway. According to the official keepers of such dismal events, the US has been in recession since December of 2007. For most of 2008, chip makers led a charmed life. Until last October, chip sales grew and slowed as if 2008 were an average year (see Figure 1). But by November (the last month for which data is available), chip sales were fully 10 percent below their September peak. The semiconductor industry now finds itself, with so many other industries, in recession.

Equipment Sales Will Be Down As Far as in 2002

The slump in equipment sales got an early start both on the chip industry and on the slumping world economy. Equipment sales have been in decline since September of 2007. As of November of last year, equipment sales were 54 percent below their September 2007 peak. They are still falling and will likely sink lower than the downturn of 2001-2002 (see Figure 2).

New Fab Activity at Record Lows

With capacity utilization rates low and falling lower, chip companies are closing plants and extending work furloughs. With credit tight, cash flow reduced to a trickle, and interest payments due on notes and bonds, some chip makers, such as ProMOS and Powerchip in Taiwan and Spansion in the US, are on the ropes and are asking for bailouts or seeking White Knights to come to their rescue. In Europe, the governments of Portugal and the state of Saxony, up against the worldwide credit crunch, were unable to agree on terms for financial aid to Qimonda in time and the company was forced to file for insolvency protection. (It is still operating as a going concern.)

In this environment, the last thing semiconductor companies want to do is spend money for more capacity. As a result, semiconductor capital spending this year will be below what it was at the bottom of the last downturn in 2002. Capital spending will be $26 billion, down 37 percent from last year, which was down 30 percent from 2007. Capital spending in 2007 was $60 billion, the second highest in the industry's history, slightly lower than the $62 billion spent in 2000.

While Intel, foundries and others have only recently begun to be bedeviled by overcapacity, memory manufacturers have been plagued by too much capacity since at least the end of 2007. As a result, the scale of new fab construction began to shrink in 2007 and last year was the lowest it has been since at least 1995. We look forward to some recovery in construction in the second half of this year, although many current plans could be pushed out to 2010. We do expect growth in construction continuing into 2010.

Looking at new fabs beginning production (one of the leading sources of new revenue for equipment makers), almost no one wants to bring a new fab online in 2009. Indeed, only one new 300mm production fab is scheduled to come online this year, which is the same number that came online in 1999 when 300mm first come into volume production. We do expect a rebound of new fabs coming online in 2010 (see Figure 3).

Recover in 2010

As we write this, 70,000 job cuts were announced in one day in the US, including 10 percent of Texas Instruments' workforce. Last week Microsoft announced its first significant layoffs ever, affecting 5,000 workers for whom such formerly arcane subjects as the length of unemployment benefits will soon be front and center in their lives.

Technology industries are enmeshed in the world economy and cannot expect to see a recovery unless and until the current recession hits bottom. No one really knows when this will happen, but there are trillions of dollars in stimuli being uncorked by governments in the US, China and the EU for our revival.

If they work, and there is some debate amongst economists about whether the US bailout of $850 billion is big enough for the task, then with luck we can expect the trough of the downturn in the third quarter of this year and a recovery in chip sales and in capital spending in 2010. And if history is any guide, a forty percent growth in capital spending by 2011.

Strategic Marketing Associates is a market research company since 1992 specializing in fab activity and capital spending. For more information, please visit www.scfab.com or email: fabinfo@scfab.com.

February 3, 2009