Capital Equipment Market to Catch Its Breath in 2007

By Ann Steffora Mutschler -- Electronic News, 12/29/2006

Semiconductor capital equipment realized solid growth in 2006, expanding 24.9 percent driven by double digit expansion in semiconductor demand and a heating competitive investment race in memory, while at the same time higher-than-expected inventories and a slowing macroeconomic environment will create a pause in 2007, says Dean Freeman, a Gartner Dataquest research VP.

“2006 was a good year for the semiconductor capital equipment industry; the industry will expand 24.9 percent, reaching the second highest level ever in the industry’s history with $42.4 billion of total sales,” he says.

“Slowing logic-related demand from IDMs and foundries alike was offset by strong commodity memory investments, resulting in healthy growth for the semiconductor capital equipment industry,” Freeman continues.

Looking ahead to 2007, the firm believes the capital equipment industry will take a breather as manufactures slow their rate of expansion to allow demand to catch up.

“The current softness in the semiconductor equipment book-to bill-ratio is indicative of this trend.  A softer macroeconomic sales environment for electronics combined with excess semiconductor inventories and strong 2006 capacity investments will cause a small contraction in equipment demand in 2007 but not a collapse in demand,” Freeman explains.

Gartner Dataquest’s current forecast for 2007 has the overall equipment market declining slightly by 0.7 percent.

Breaking growth down by major equipment segments, the firm is forecasting wafer fab equipment to turn in a nearly flat year with 0.6 percent growth, and there is a considerable possibility that the year will turn negative while the industry forecasts for the backend equipment segments.

Specifically, the firm is forecasting a market contraction for packaging and assembly equipment (PAE) of 5.7 percent and for automated test equipment (ATE) a contraction of 5 percent

Inventory concerns linger

Incremental rises in inventories through Q3 2006 remain a concern while the industry is in the midst of the year-end holiday sales, Freeman notes. “Chip makers have taken first steps in Q3 to curb further accumulations. Declining fab utilization rates for Q3 2006 reflect an unseasonably strong slowing in wafer starts growth during the quarter with further production slowdowns expected,” he says.

On the demand side, much hinges on the Holiday and New Year selling season. “We remain cautions for the first half of 2007 and expect some production adjustments as well as pricing pressure, both lowering the need for more capacity,” he notes.

Logic and commodity memory driving investments

Driving investments in 2007 is a combination of a revival of logic-related capacity investment as the year progresses with continued strength in commodity memory, the firm says. In fact, their current statistics show that memory spending could potentially reach a new high, accounting for 50 percent of total capital spending – and therein lays the biggest risk and volatility for 2007.

“In recent years the industry has done an admirable job in watching its investments in new capacity, directly correlating them to end demand to the point that there is a well-founded sense of increased control of the supply-and-demand picture,” Freeman explains.

“As we have stated numerous times, the possible exception might be the commodity memory segment and especially NAND flash. Our current models point at a shallow state of overinvestment in 2007 for commodity memory – NAND Flash and DRAM combined,” he continues.

“At the same time, we see the risk in the supply-demand equation rising due to high levels of investment and slowing bit growth compared to recent years. But we are not talking about a cataclysmic meltdown in spending. Flash spending ramped further in 2006 in the annual comparison but, by year end, flash investments have slowed and some orders have been pushed out,” Freeman went on.

“We foresee further weakness in the order picture into late Q1 and/or early Q2 when several major orders might be released. Still, further caution is called for as bit growth is slowing in historical terms and price-to-unit elasticity is decreasing as the market continues to mature,” he adds.

In the end, Gartner Dataquest says its current thinking has 2007 slowing, but not significantly.

2008 is still expected to be a fairly robust year for the equipment market, albeit a bit slower compared for to last quarter’s release with the reduction in growth based the demand forecast has not grown while capacity investments in 2006/2007 have risen, leaving less room for expansion in capital spending. Still, capital spending should peak at $65.7 billion, the firm says.

“The industry will enter a cyclical downturn in 2009 but returning to growth during 2010,” Freeman concludes.