"This Rebound is Different"

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“This Rebound is Different”

Market Booms but Analysts See Signs of Caution

As the semiconductor capital equipment and materials market enjoys nearly unprecedented year-over-year growth, many industry analysts see signs of caution on the horizon. The most recent SEMI Book-to-Bill ratio reached 1.23 (meaning that $123 worth of orders was received for every $100 of product billed for the month) and the three-month average of worldwide bookings jumped 220.4 percent above 2009, but a packed audience of industry leaders heard mixed signals related to 2011-2012 growth at the recent Silicon Valley Lunch Forum.

Bob Johnson of Gartner sees capital spending up over 90 percent in 2010 and continuing to increase in 2011. He sees, “strength through 2012, then retrenchment.” After reaching $35.4 billion in 2010, Gartner’s current cap spending forecast reaches $37.7 billion in 2011 (6.6 percent growth) and $40.8 billion in 2012 (8.2 percent growth). Gartner’s current Capex estimate for the 2013 “retrenchment” is $34.9 billion, a decline of 14.6 percent from 2012 estimates.

Gartner’s current data indicates market strength — IC unit volumes and equipment are surging, driven by strong end user markets, especially PCs and mobile phones. Johnson does acknowledge, however, uncertainty caused by recent company announcements. While global economic recovery is strong, U.S. economic growth is apparently softening and uncertain. He also sees volume declines at the packaging, assembly and test houses, and some indication of inventory increases in the supply chain.

Capital Spending: Growth Slows After 2010

Bill McClean of IC Insights is quick to point out that the current weak U.S. economic recovery is not representative of the overall global market environment. Modest GDP growth in the U.S., Europe and Japan projected for 2010 should not obscure the robust 7.3 percent growth elsewhere in the world. China’s GDP is projected to grow 10.6 percent and India 8.5 percent, and much of this rising prosperity is driving strong global IC demand.

But McClean does acknowledge, “This rebound is different.” Unlike any other year since 1983, after two down years in capital spending, this year’s capital spending surge will be in the first year of recovery, not the second. Capital spending will increase by a reasonably robust 9 percent in 2011, but far less than the 93 percent he projects for 2010. Every year in the modern history of semiconductors, the largest increase in capital spending has occurred in year two of the recovery.

Does this cap spending trend signal a more modest cyclical decline in 2013, or is the industry entering an era with new spending patterns? Typically capital spending will decline after a 50 percent increase in Capex, but this year’s IC wafer capacity will only increase an estimated 1.6 percent after an unprecedented 7.6 percent decline last year (capacity has only declined one year in history). And, 300mm IC fab utilization will reach 98.4 percent, suggesting the market can easily accommodate the recent increase in capital spending.

Both analysts agree that future cycles will be primarily driven by memory manufacturers. Johnson estimates 41 percent of 2010 Capex will come from memory fabs, versus 21 percent from foundries/OSATs and 17 percent from other IDMs. McClean ranks six of the top ten capital spenders in the memory segment, representing 55 percent of the total spending from these top companies. Memory firms have been most susceptible to the market forces that accelerate super-cyclical swings in capital spending. In addition to the traditional cycles influenced heavily by rising then falling ASPs and fab utilization rates, Johnson suggests that capital spending by memory makers will also not have sufficient net cash flow to fund future Capex needs.

The cyclicality —or super-cyclicality — of spending patterns is a challenging and unique attribute of the semiconductor industry. In one of the most demanding R&D industries in the world, the IC supply chain has endured radical swings in capital spending while keeping pace with the relentless Moore’s Law and stockholder expectations. The rapid rebound from last year’s alarming drop in equipment spending (down to less than $17 billion from a 2007 high of over $44 billion) is a testament to the ingenuity, flexibility and resourcefulness of SEMI members. Whether this Ph.D.-intensive industry can sustain another swift drop in spending remains to be seen, but for the next few quarters, a positive market environment looks certain. Beyond that, only time will tell.

For a copy of the presentations from this Silicon Valley Lunch Forum, please visit our “Members Only” website: www.semi.org/en/EventsTradeshows/ctr_040131

September 7, 2010