Fab kit spending drop to drive chip prices up

The average selling price of semiconductors is set to rise this year following years in decline, but it will come at the cost of the companies who supply manufacturing equipment to the chipmakers, according to analysts speaking at SEMI's Industry Strategy Symposium in California on Monday (14 January)

Spending on production equipment for semiconductors is likely to fall this year despite a recovery in chip prices, according to analysts speaking at the Industry Strategy Symposium in California organised by tool-builders' group SEMI.

Jim Feldhan, president of Semico, said the chipmakers are entering 2008 with good fundamentals in place. "We are entering 2008 with inventories under control and prices in some categories are on the increase," he noted.

But the situation is not looking so good for equipment suppliers, as chipmakers want to tighten the supply of semiconductors. Stanley Myers, president of SEMI, said the organisation forecast a fall in equipment spending: "We think the decline could be 10 per cent or a little greater."

Aida Jebens, senior economist with VLSI Research agreed, saying that inventories are currently at the lower end of their normal range. Inventory overhangs tend to lead to rapid declines in pricing the cycle normally leads to sudden drops in fab utilisation which encourages vendors to reduce prices in attempts to foster demand.

With inventories under control, fab utilisation is high. Jebens claimed: "The utilisation rate peaked above 95 per cent in October/November last year. It is now at a seasonal low but still above 90 per cent. That is being driven by double-digit unit shipment growth."

Dean Freeman, vice president of research at Gartner, added: "Inventories are under control and should continue that way barring any major dislocation in the economy, we think this should lessen the impact of any recession."

Although Myers said the picture for end-user demand 2008 was clouded by uncertainty over the US economy because of the credit crunch and a falling market for housing, IC Insights president Bill McClean claimed that the biggest factors driving the IC and equipment businesses this year are primarily internal to the industry. As long as global gross domestic product (GDP) remains in the range forecast by economists for this year, a slow tightening of chip supply driven by a slowdown in equipment spending should start to push up chip prices.

"Only 8 per cent of cellphone shipments in 2007 were in the US. In terms of total electronics consumption, about 25 per cent is in the US. Seventy-five per cent of electronics systems are consumed outside the US. Ten years ago it was 35 per cent [into the US]. It is probably going to 20 per cent. A mild recession in the US is not the be-all and end-all, assuming a mild recession in the US," McClean explained.

Fab utilisation is already high, thanks to surging unit volumes 2007 marked the sixth consecutive year of unit growth, McClean noted. But the chipmakers and foundries are not moving as they once did to boost capacity in the hope of capturing more market share. Instead, they are cutting back.

"Capital spending as a percentage of sales is coming down," said McClean, claiming that this will lead to higher market growth than has been seen since the boom of 2000. Chipmakers are cutting capital expenditure, partly as a result of their move to fab-light programmes, where much of their production, particularly for capital-intensive leading-edge processes, is outsourced to foundries.

Feldhan pointed out: "Utilisation rates were low at the beginning of last year. But the foundries are pretty much full now. The utilisation is above 90 per cent on the leading-edge processes. Manufacturing is in a good state to stabilise average selling prices. And we think capital expenditure will decline around 8 per cent in 2008. That will create a reasonable state for 2009."

McClean claimed the picture that is emerging is of a long-term situation of tight supply that will force the average selling price up. "Companies are really changing their outlook on capital spending. It is setting up a collision course in the industry. Companies are talking about having low capital spending as a percentage of sales. A lot of companies are going to the fab-light model but that is running right into the pure-play foundries getting conservative on capital spending themselves. People are expecting the foundries to come big on capacity at the same time that they are cutting back on capacity spending.

"Look at TSMC: why are they talking about spending 20 per cent of sales? Because their revenue per wafer keeps coming down. Three years ago, the revenue was $1,500. Last year it was $1,200. They don't want to play in the $1,000-wafer marketplace. And, when TSMC announces they will spend 20 per cent of revenues on capacity, because they are a foundry, that really means 10 per cent of sales," McClean added, noting that, because foundries do not supply chips directly to end users, they do not see the same margin that the integrated device manufacturers obtain. "What is going to give, we believe, is the IC average selling price. The IC manufacturers are serious this time.

"We believe there will be good unit volume growth and better average selling prices, that will lead to better IC market growth. But it might be at the expense of the capital equipment guys in the short-term," said McClean.

Image: Rising chip prices will not help the makers of fab equipment in 2008

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