Gartner: Lull in semi equipment demand has arrived
By Ann Steffora Mutschler, Senior Editor -- EDN, July 11, 2007
As new equipment orders recede based on exhaustion of DRAM capital spending budgets, and other segments not increasing their budgets to compensate, the lull in demand for semiconductor equipment has arrived, according to market researchers at Gartner Dataquest.
Semiconductor capital spending is experiencing a shallow correction that started in Q2 to extend into early 2008 translating to growth of less than one percent for this year. After this pause, capital spending growth is expected to revive, but at only about 5 percent for next year. Spending in memory segments will remain the dominant factor in overall market performance, the firm noted.
And, with annual growth in semiconductor device sales anticipated at 2.5 percent, (including solar revenue) and soft DRAM pricing, not much upside hope remains for 2007, the firm believes.
Still, the firm pointed out that equipment spending has moved toward the upper end of its forecast scenarios laid out in April, pointing at a slow single-digit market expansion of 2.7 percent for this year. As for 2008, the firm is forecasting DRAM spending to decline from this year’s peak, and equipment market growth will originate from NAND, logic and foundry, which will drive a second year of slow single-digit growth of 6.2 percent.
At the same time, strong forecast for DRAM unit demand in 2008 negates concerns of overcapacity and provides upside potential for next year.
Currently, Gartner Dataquest is forecasting the following in a report released today:
--Overall capital spending to rise 0.6 percent this year, and 4.8 percent next year.
--Wafer fab equipment (WFE) segment revenue will rise 5 percent this year and 4.8 percent next year.
--Revenue for the packaging and assembly equipment (PAE) segment will decline 5.7 percent this year, but will grow 13.1 percent next year.
--Revenue for automated test equipment (ATE) will decrease 4.8 percent this year, but will grow 10.2 percent in 2008.
--Foundry market revenue will grow 4.5 percent this year and 18.2 percent next year.
--Revenue for the semiconductor assembly and test services (SATS) market will increase 9.8 percent this year and 16.5 percent next year.
Specifically, growth rates for the capital equipment industry are slowing this year, the firm says, because semiconductor manufacturers are catching their breath after a strong 2006.
The current softness in the semiconductor equipment book-to-bill ratio points to this trend.
Further, a combination of factors, including residual semiconductor inventories in Q1 and strong 2006 capacity investments - especially in memory - is leading to a slowdown in equipment demand throughout 2007.
The quarterly picture for capital equipment revenue for 2007 shows that Q1 sales were up 3 percent but the firm continues to affirm its previous forecast assumption that the remainder of 2007 will be soft as the semiconductor industry absorbs its capacity additions from 2006.
The quarterly pattern that is emerging bears a strong resemblance to that of 2005, following a very strong 2004: a three- or four-quarter decline in shipment rates before growth resumes, due to some of the unsold holiday season inventory from Q1 seems to have burned off, and a gradual increase in device sales has started. However, at the end of Q4, inventories were high, and chip makers slowed production through Q1 to stop further inventory accumulations.
Combined with continued capacity investments, this resulted in declining fab utilization rates for Q1 in excess of the typical seasonal pattern, which tends to push out demand for new capacity by a few quarters, especially for device types that are application-specific. Since then, inventory levels have improved, but much still hinges on consumer spending for the rest of the year.
Plummeting DRAM prices in response to excess capacity have kept a lid on any increase in DRAM-related spending, and with investment plans loaded in the first half of the year by many manufacturers, quarterly capital expenditure spending is decreasing as allotted budgets are being exhausted.
The firm notes that there is no real upside for memory spending. There may be minor changes in capex plans by selected DRAM vendors as they jockey for market share or adjust capacity in response to demand, but the overall trend will be for a slowing in spending for the remainder of this year.
On the positive side, soaring unit volumes —more than a 47 percent rise in DRAM unit sales is anticipated for the year — ensure that total capacity will not remain in an excess condition for long. As a result, the firm remains cautious for the rest of the year, and expects some production adjustments as well as pricing pressure to occur.
Driving investments for the remainder of this year and into 2008 will be DRAM. Although memory investment, especially in DRAM, will slow, it will still represent the largest segment for capital investment, Gartner believes.
Although excess DRAM capacity resulted in plunging prices in the first half of the year, aggressive efforts by manufacturers to shrink their designs have allowed segment leaders to maintain marginal profitability at the current depressed average selling price (ASP) levels.
Accordingly, while DRAM investment will slow in the second half of this year and into next year, it will represent more of a slowdown in the rate of capacity creation, rather than a full-blown stop.
NAND oversupply is melting, and pricing is improving. Hence, NAND spending will pick up in late 2007 and into 2008 as demand growth continues unabated. Logic-related capacity investment, for integrated device manufacturer (IDM) and foundry combined, should decline about 9 percent in 2007, despite increased spending by the top four foundry players, and this will increase by a similar amount in 2008.
Finally, Gartner Dataquest maintains that 2007 will be a slow year, impacted by the overspending in the memory segment, followed by the inevitable slowdowns. However, while it raised its equipment spending forecast only slightly for the year, the firm is significantly altering its annual picture going forward to show similar annual growth numbers for 2008, but with an accelerating quarterly shipment pattern, leading to a relatively strong 2009. The next annual downturn has been pushed out to 2010, with a return to growth in 2011.
