Gartner: Semi capital spending to contract by 4% in 2008

By Ann Steffora Mutschler, Senior Editor -- Electronic News, 10/3/2007

In this last quarter of 2007, the harsh reality of a semiconductor order slowdown that started in Q1 is now evident, prompting market researchers at Gartner Inc. to lower expectations for the semiconductor manufacturing equipment market in 2008.

SEMI’s August book-to-bill ratio dropped to 0.83 due to orders and billings receding from their highs but the firm reminds that even with the bad news, 2007 has an upside: Firming average selling prices (ASPs) in the microprocessor (MPU) and memory segments have pushed the semiconductor forecast up to 3.9 percent.

Also, memory demand has been driving new capacity, which in turn is driving 300-mm equipment buys, fueling a “hot” first half of the year that trailed off into Q3. As a result, Gartner slightly raised its 2007 capital spending and equipment forecasts to 4.1 percent growth.

On the other hand, the upside for 2007 will impact 2008, and Gartner now expects 2008 to move from slightly positive this year for capital expenditure (capex) at 1.5 percent and wafer fab equipment (WFE) at 6.4 percent to slightly negative at negative 4.4 percent growth and negative 1.3 percent respectively for next year.

For the back-end equipment markets, Gartner is forecasting a market contraction of 3.4 percent for packaging and assembly equipment (PAE) and a contraction of 4.8 percent for automated test equipment (ATE).

For 2008, the overall equipment market is predicted to slow, with growth slightly positive, at a mere 0.3 percent. The WFE and the back-end segments will exchange places, as WFE declines 1.3 percent, while PAE grows 5.5 percent and ATE increases 7.3 percent, the firm said.

The quarterly picture shows a strong Q1 and Q2 for capital equipment sales. Revenue softens, but not significantly in Q3, with more significant declines in Q4. With the softening of bookings worldwide, Q1 2008 is anticipated to be slow compared with Q4, which is atypical because the Japanese companies usually buoy up Q1 as the Japanese close out their fiscal year.

Gartner points to several reasons for the slowing of the equipment market including memory investment budgets being largely spent, especially for DRAM, and with profits largely gone, there is no money to fund any increases.

Another reason for the slowdown in the semiconductor manufacturing equipment market is that MPU manufacturers are in the midst of a pricing war and have reduced capex for this year, even with the ramping up of the 45-nm technology node.

Foundries have not seen the demand pull for the leading-edge technologies; for example, 65-nm accounts for only about 3 percent of TSMC’s revenue, and as a result, TSMC has shifted to less-expensive, mature technologies that are currently in high demand, the firm noted.

In 2008, Gartner forecasts DRAM capex to drop, with logic spending further declining year-over-year. NAND flash capex is expected to rise as the new capacity additions are needed.

Foundry spending will provide some relief, but the combination of NAND flash and foundry spending will not counterbalance the impact of slowing DRAM and logic integrated device manufacturer (IDM) spending, the firm noted.

Gartner expects DRAM spending cuts to be limited as the transition to the 300-mm wafer size is required since 200-mm fabs are not capable of cost-effectively manufacturing at or below 65-nm, with trends in DRAM pricing playing a key role in capex cuts in 2008.

The capital equipment industry in 2008 will benefit from a market in which the major capex spenders are out of sync with one another — for example, DRAM and logic IDM spending is down, while flash and foundry spending is rising. We anticipate these segments will become more in sync in 2009 and 2010, pushing up the market in 2009 and prior to a significant spending slowdown in 2010

Finally, Gartner reminds that capital spending by the memory segments is projected to continue at levels above historical norms, but says it is important to ask what is driving it, how long it can continue, and whether there a possibility of a repeat of 1996, when memory investment crashed in the midst of generally good economic conditions?

Fortunately, the firm believes this is an unlikely scenario for two primary reasons. First, in the past, memory spending was driven by DRAM, but now is also driven by aggressive demand increases in the NAND flash segment. DRAM spending is running at historical levels, and it will be down significantly next year, but NAND spending will take up much of the slack, Gartner says.

In addition, with 200-mm memory fabs reaching the end of their ability to keep operating at the leading edge, the firm reminds that new 300-mm capacity must be installed to compensate, which will drive memory spending over the next few years, by a combination of the need for additional new capacity and the need to replace older capacity.

These factors combined make it unlikely that a 1996-type crash will occur in the near future, although the possibility of it happening cannot be ignored, Gartner concluded.