Gartner downgrades 2007 semi, foundry market growth

By Ann Steffora Mutschler, Senior Editor -- Electronic News, 5/29/2007

In a preview of its Q2 semiconductor forecast, due tomorrow, Gartner Inc. analyst Richard Gordon said in a research note that when the firm publishes its forecast update, it is likely to make a slight downward revision to the market growth rate for the year from 6.4 percent to below 5 percent.

The firm also separately downgraded its semiconductor foundry market growth forecast for the year to 5.1 percent, after suffering a drastic dip of 12.5 percent in Q1. However, Gartner expects the foundry market to recover in Q2.

Overall, Gartner advises semiconductor suppliers to prepare for weakening market conditions this year, especially in DRAM.

A growing bright spot in the semiconductor industry is the automotive segment, in which Gartner estimates that worldwide vehicle unit production growth will increase from 3 to 4 percent this year, having a beneficial effect on automotive semiconductor unit shipments.

The firm said in a research note that an increase in global vehicle production this year will have a positive effect on the automotive semiconductor market, though this will likely be offset by weaker ASPs, especially in ASIC, ASSP and DRAM.

In the memory market, DRAM revenue growth is now expected to be flat (or slightly negative) for the year, compared to Gartner’s previous expectation of 10 percent. While the firm is increasing its bit growth forecast, it will not be enough to offset more severe ASP declines.

Gartner expects revenue growth for NAND flash to likely be revised upward slightly, pushing it into positive growth territory, reflecting a less severe annual ASP decline this year, with bit growth slightly more moderate than previously forecast.

In the programmable logic space, Gartner said its FPGA/PLD growth rate forecast for this year will likely be revised down from 3 to 1 percent to reflect vendor financial performance and guidance.

In the ASIC space, sales were down by up to 15 percent sequentially in Q1, with this weakness expected to continue in Q2. As a result, Gartner said it will likely drop its forecast for ASIC market growth from 10 to 9 percent.

For ASSPs, excess inventory has been cleared, but ASP pressure continues. Gartner is now forecasting annual growth in the 3 to 7 percent range for the year, but this outlook depends on a strong second half.

In the semiconductor manufacturing market, Gartner said it is beginning to see some customers de-commit on equipment orders and push them out by three to six months especially at TSMC and the major memory vendors, and these moves have already been factored into its most recent capital spending forecast, which predicts flat growth this year.

Manufacturing capacity utilization is 85 percent in both front-end and back-end manufacturing. The typical "trigger point" for increased investment in additional capacity is 90 percent utilization, Gartner reminded.

Gartner said its bottom line for the semiconductor market is that it will likely revise downward its forecast for total semiconductor market growth this year from 6.4 to 5 percent. If the firm sees further reductions in capital spending, growth in 2008 may be stronger than previously forecast, possibly rising above 10 percent.

In a separate research note, Gartner analyst Kay-Yang Tan gave a Q2 update on the semiconductor foundry market, including a most likely scenario and two alternative scenarios for the forecast.

Key findings for Q1 showed that foundry market revenue was down 12.5 percent sequentially as sales revenue fell drastically to $4.7 billion compared with $5.4 billion in Q4 2006, Tan said.

These results fell into the worst-case scenario as projected in Gartner’s last-quarter forecast update. Revenue was down drastically because of intense pricing pressure and an inventory correction. The leading-edge process was hit the hardest, with capacity at most of the 12-inch fabs running only slightly more than half full in January. Because of the sharper-than-anticipated decline for Q1, Gartner revised down its foundry market growth for 2007 to 5.1 percent. 2008 is still forecast as the boom year, albeit growing lower than the firm’s last-quarter forecast update. These revisions are made in line with Gartner’s semiconductor market forecast, in which total device revenue is now projected to grow less than 5 percent in 2007 and only a modest 8.2 percent in 2008; both years have been revised downward, but more significantly for 2008.

Also, Q1 wafer shipments reached 5.5 million 8-inch-equivalent wafers, down sequentially by 3.8 percent, lowering the average fab quarterly utilization rate to 80 percent, while the wafer average selling price (ASP) was down as much as 9.1 percent because of a lower product mix and weakening demand, especially in the leading-edge segment.

Gartner did say stronger-than-expected demand and an upbeat recovery, especially in the PC segment; capital spending restraints leading to the tightening of fab utilization rate; and better product mix and pricing environment related to aggressive 65-nm process ramp-up could accelerate growth in the foundry market, moving the forecast toward an optimistic scenario.

Factors that may inhibit growth in the foundry market, increasing the likelihood of a pessimistic forecast scenario, include a sagging in the global economy in light of rising oil prices and interest rate hikes; slower-than-anticipated adoption of leading-edge designs and excess capacity expansion, resulting in pricing pressure and depressed revenue growth.

Gartner expects that most likely, the industry will be weighed down by a drastic inventory correction and the usual seasonal slowing, given that the foundry market declined sharply sequentially in Q1. Nonetheless, Q1 will mark the trough of the foundry market cycle because demand is anticipated to recover across the board from Q2 onward, the firm said.

Following two straight consecutive quarters of decline, Gartner estimates that the foundry market will grow 11.9 percent sequentially in Q2, mainly because of inventory replenishment and a better pricing environment.

Wafer shipments are projected to be up 9.1 percent in Q2, reaching 6 million 8-inch-equivalent wafers — as orders for the leading-edge process ramps up, thereby lifting the fab utilization rate to 84.4 percent.

As a result of the sharper-than-anticipated decline registered in Q1, Gartner revised down its foundry market growth for 2007 to 5.1 percent.

The general business outlook in the second half of the year is deemed better than the first, especially with the much-anticipated 65-nm ramp up.

While annual wafer shipment growth is expected to reach 12.8 percent, the wafer ASP will drop as much as 6.8 percent this year, and with capital expenditure (CAPEX) guided to be relatively flat compared with last year, fab capacity is projected to increase 12 percent year over year, stabilizing the overall utilization rate at about 88 percent.

Finally, Gartner’s long-term forecast profile for the foundry industry remains relatively unchanged. 2008 continues to represent the next major growth year, with revenue expected to be up as much as 20.8 percent, hitting the $27.4 billion mark, with fab capacity estimated to reach 32.8 million 8-inchequivalent wafers, up 13 percent from this year, with the majority of the expansion coming from the 12-inch fabs.