Semi equipment demand not expected to recover until 2010, Gartner reports
Gartner recommends that the semiconductor industry prepare for a prolonged downturn while device manufacturers adjust supply to meet slowing demand, with equipment suppliers needing to prepare for a slower-than-anticipated 2009 and potentially fewer memory customers when the industry returns to health. Also, Gartner suggests that mergers and acquisitions should be considered as a way to consolidate the industry and gain better profitability as the industry emerges from this slowdown.
By Ann Steffora Mutschler, Senior Editor -- EDN, October 8, 2008
As the global economic slowdown continues to have a significant impact on the semiconductor industry, capital spending is still slowing across the board, with all segments seeing a decline in capital spending in 2008 and through 2009, according to market researchers at Gartner Dataquest.
The company said oversupply in memory, combined with a slowing consumer market due to the uncertain economic picture, gives little hope for an upside until 2010 with the most likely scenario showing capital spending declining 25.7% in 2008 and down by another 12.8% in 2009 with growth expected to return in 2010.
As such, Gartner recommends that the semiconductor industry prepare for a prolonged downturn while device manufacturers adjust supply to meet slowing demand, with equipment suppliers needing to prepare for a slower-than-anticipated 2009 and potentially fewer memory customers when the industry returns to health. Also, Gartner suggests that mergers and acquisitions should be considered as a way to consolidate the industry and gain better profitability as the industry emerges from this slowdown.
The semiconductor industry runs on supply-and-demand cycles and historically, supply has outpaced demand because of the overbuilding of fabs. Due to this, the equipment industry undergoes boom-and-bust cycles every two to four years.
However this year, a global economic slowdown, combined with a major financial meltdown, has led to consumers retrenching and slowing semiconductor demand, which has resulting in increasing inventories, because of significant production buildup. In turn, this has generated an excess of production capacity in the semiconductor manufacturing space that will need to be absorbed before growth can occur.
The impact of this situation is that the semiconductor equipment industry will see a significant slowdown in 2008, followed by a second negative year in 2009, marking the fourth time that wafer fab equipment spending has had two negative years back to back, Gartner said. Like all the other times, it occurred after a major overbuild in the manufacturing space and will impact all segments of the industry with memory feeling the biggest impact, while foundry and IDM logic also slowing their capex.
In terms of the overall semiconductor industry environment, the company explains that semiconductor units continue to grow at nearly 10% in 2008, but declining average selling prices (ASPs) are causing revenue growth to run at about 4%, with an expected compound annual growth rate (CAGR) of 5.2% from 2007 through 2012.
Gartner believes that with ASPs continuing to decline and industry profitability low, this makes the industry ripe for consolidation, not just in the memory sector but also in the fabless and consumer sectors.
The impact of several long-term trends that determine industry growth patterns overall include:
• Long-term growth rates for the semiconductor industry moving toward sustained single-digit rates for some time, with this trend likely to continue.
• Increases in unit volume accompanied by decreases in ASPs, in accordance with standard supply-and-demand economics.
• Increased costs of continually moving to smaller and smaller feature sizes has driven many companies to slow the migration of their product to the absolute leading edge, thus stretching out technology nodes.
• Commodity memory revenue growth to be virtually stagnant through 2012, despite soaring unit volumes and continued capital investment. This segment needs to return to profitability in the near future, through either consolidation or slower capital spending.
• The industry's capital intensity reset from approximately 20% in the late 1990s and early 2000s to about 15% from this point on. The reset will have a significant impact on semiconductor equipment companies' future profitability.
As such, most semiconductor sectors are expected to see relatively slow growth, as noted by the rather anemic CAGR during the next five years, Gartner said, with memory supply and demand to continue to have the greatest impact on the market and will be either the source of growth or the reason for a decline.
Gartner's segment spending expectations for 2008 are as follows:
• Memory spending will be down 36% in 2008 and nearly 17% in 2009 as excess capacity is absorbed, and production capacity that has been taken offline is brought back as demand for memory resumes. DRAM is expected to decline 44% in 2008 and 14% in 2009. NAND flash will decline 23% in 2008 and 22% in 2009.
• Foundry spending will continue to be slow as the competition for leading-edge devices becomes stronger. Fabless companies will continue to be conservative in moving to the next-generation technology node; in many cases, they will skip nodes in an attempt to amortize design and mask costs over two generations. While foundries have 40 nm and 45 nm capability, growth in the leading-edge segment has been slow. Gartner expects foundry spending to decline 29% in 2008 and 15% in 2009.
• The move to "fab lite" for logic and mixed-signal devices is under way. This had an impact on logic spending in 2008 as Sony, STMicroelectronics and TI all announced moves to a fab-lite strategy. Spending in this segment is expected to decline 16% in 2008 and decline again by 9.4% in 2009.
• Spending by semiconductor assembly and test services (SATS) companies (included in the total capital expenditure [capex] picture for the first time) will decline only 10.8% in 2008. This decline will be fueled by continued increases in unit volume, despite revenue declines in the memory sectors, and an ongoing mix-shift to higher-priced packaging types.
At the end of the day, the excess spending of 2006 and 2007 has hit home in 2008, and the equipment industry will continue to feel the pinch well into 2009. The oversupply in the memory sector and a slowdown in consumer spending due to the economic malaise in most of the G8 (which includes Canada, France, Germany, Italy, Japan, Russia, the United Kingdom and the United States) economies is having an impact on consumer electronics spending, which in turn impacts foundry and IDM spending, Gartner said.
Semiconductor units will still grow at or near the 10% level, but ASPs will continue to fall, thereby stunting device industry profitability for the next two years, the company continued.
Further, the NAND and DRAM industry has begun to take steps to lower production rates at 300 mm, and 200 mm fabs are being taken offline, which will have a positive impact, but it will take time because inventories of die banks need to be worked down until memory prices firm. With production shuttered that can be easily restarted when demand returns, the memory sector will be able to ramp up to meet demand before it needs to purchase new equipment. This action, along with other economic factors, will keep the equipment side of the industry in a no-growth mode until 2010.
“At this time, we are recommending that equipment manufacturers settle in for a second year of declining revenue. There will be some bright spots as refurbished equipment and technology buys will continue to grow, but capacity buys will be placed on hold until inventories are worked down, and demand picks up in the market. Companies should continue to invest for the future, looking at technology as well as how productivity can enhance their product portfolio,” the company wrote in its report today.
In late 2009 the semiconductor capital equipment markets should see improvement because demand will be improving, and the G8 economies should be returning to growth by then, Gartner concluded.
C.J. Muse, semi equipment analyst at Barclays Capital (formerly Lehman Brothers) also expects the pain to continue into 2009.
“Led by our outlook for capex declines in 2009 and only a modest recovery in 2010, we expect further cuts to consensus estimates. While we view the buy-side as, again, ahead of the sell-side on this front, we do look for cuts this earnings season to be significant. And to this end, we see potential for, finally, capitulation by investors on the group. With investors historically placing support at “historical book” and “revenue-based” trough levels, we look for a muted view on growth driving a greater focus on “true earnings power” and that this will lead to even greater segmentation in the group. Considering this view, coupled with valuations that are expensive relative to other segments of tech, we tend to view the group with risk to the downside for the foreseeable future,” Muse wrote in a recent report.
Further, he sees capex as down 15% in 2009 versus his previous estimate of flat to up 5%, based on the view that memory will continue to remain in oversupply through the first half of 2009 and that this will drive another leg down in spending, along with the macro-haze that will slow end-demand and limit foundry spending, and muted spending by IDMs.
