Capital Equipment Outlook 2007: Spending Heading South

By Ann Steffora Mutschler -- Electronic News, 12/21/2006

As 2006 draws to a close, it is now clear that consumer electronics demand drove every segment in the semiconductor industry including manufacturing equipment. In fact, consumer-aimed devices consume more than 50 percent of total semiconductors produced, according to a recent panel of industry analysts.

To put into context the drivers for the capital equipment industry, Gary Grandbois, an analyst with iSuppli Corp. noted that in 2006, there was a decline in semiconductor industry growth, even though particular equipment segments grew, following strong growth of the equipment industry in 2005.

For 2007, iSuppli is expecting a slight increase in equipment growth based on PC market growth in 2006, which it observes as having recovered in the second half of the year. Specifically, iSuppli noted less than 9 percent PC unit growth in 2006, and is expecting PC unit shipments to growth above 10 percent in 2007. This is key, Grandbois noted, because PC sales drive the data processing market, which essentially drives semiconductor given than data processing consumes 40 percent of semiconductors.

iSuppli predicts that in 2007 the consumer market will rebound, pushing semiconductor growth to between 10 percent and 11 percent with stable average selling prices (ASP) and an uptick in PC consumption, Microsoft’s Vista operating system being released and stronger IT upgrades, Grandbois added.

In another camp, Gartner Dataquest analyst Richard Gordon predicts a slightly weaker market in 2007, with PC unit growth of 8 percent, down from 9 percent in 2006. The weakening handset market is also impacting semiconductor, as it is weakening quickly from high-teens-percent growth this year, to less than 10 percent growth in 2007.

“Looking further out, we think the market will peak in 2008, with a downturn in 2009,” Gordon said.

This marks a change in the overall semiconductor industry. “As consumer demand becomes more of a factor, we are finding that revenue growth is being hampered somewhat by constant downward pressure on ASPs, even though we’ll see the strongest unit growth for electronics and semiconductor unit growth as well. The ASP pressure is really putting a dampener on revenue growth through the next cycle,” he explained.

“The long term compound annual growth rate [CAGR] for the semiconductor industry was 16 or 17 percent up to 1995, and since then it has trended downward, and through 2010 and beyond it will trend into the single digits which means the industry will be less volatile and we won’t see such strong growth in the strong years, and won’t see such dramatic declines in the down years,” Gordon added.

Macroeconomics Count

Highlighting the impact of macroeconomics on the semiconductor industry and manufacturing equipment segment, Steve Szirom of InsideChips said he is “very cautious” for 2007 given that consumer spending, which has become such a big factor in the chip business, is going to slow down because of higher interest rates, compounded by the housing slowdown not being as soft of a landing as most people are predicting.
 
Further, he believes there is an unprecedented buildup of capacity – a lot of it in memory, which will drive ASPs down. “When there is a lot of capacity and not enough demand, as always, the chip industry cuts prices. So while the units will increase next year, a lot of damage will be done by erosion in ASPs,” he offered.
 
Still, Gartner Dataquest’s Gordon maintains there is a mild cycle ahead.
“2007 is quite difficult actually if you look technically at the WSTS data historically and if you look at typical growth rates. You can make a case for a flat year in 2007 or even slightly negative. But you can also make a case for high-teens growth as well from a statistical standpoint,” he said.
 
Also, “we do feel the market is starting to weaken a bit despite the control being put on it by the suppliers to rein in inventory and keep capex in check,” Gordon noted.
 
“We think demand is starting to weaken a bit particularly in the cell phone space, and if we do see consumer spending being impacted by some macroeconomic thing, then we could see a system slowdown on the demand side and that could cause sluggish growth next year. And a mild recession is possible,” he added.
 
What this all boils down to is a 2007 semiconductor manufacturing equipment market forecast quite a bit lower than 2006.
 
Risto Puhakka, president of VLSI Research said, “Growth in the equipment market this year was very good and we expect a 22 to 23 percent growth rate for 2006, falling off to 3.2 percent growth in 2007. There are some concerns on the capex side, which translates to the equipment market because there are some memory suppliers who have capex rates are said to be at the high end of the ranges, which may cause them to cut more than expected.”
 
Dan Tracy of industry consortium SEMI added that SEMI members are expecting about 4 percent growth for 2007, which looks better than it did in mid-2006, when 2007 was predicted to be flat. However, based on investments in the memory sector, SEMI members upped their forecasts for 2007.
 
“This has been a very strong year in unit growth of about 20 percent growth in total silicon wafer area shipment from wafer suppliers to chipmakers,” he said, which will drop down to 5 percent growth in overall wafer shipments for 2007,” Tracy explained.
 
Growth will be entirely in 300mm wafers, as 200mm wafer shipments drop by 4 percent.
 
A final observation by Tracy: “When you look at strong unit trends for the industry, there is a squeeze happening from both the top down and the bottom up. End market pressure is having an impact on suppliers, and from the bottom up, the industry is seeing higher prices for copper, gold and other materials costs. This squeeze is constraining what money is available to companies to develop for the next generation of technology.”

This panel was moderated by Peter Singer, editor-in-chief of Semiconductor International, which is owned by Reed Business Information, the parent company of Electronic News.

This story is part of Electronic News’ 2007 outlook series. For looks at other vertical markets, click here.