IC Insights warns of disconnect between capital spending cuts, volume shipment increases

Considering the strong unit growth rates being seen in memory and logic ICs, there simply isn’t much "wiggle room" for additional cuts in capital spending budgets at most chipmakers, IC Insights cautions as it lowers its 2008 semiconductor capital expenditures expectations.

By Suzanne Deffree, Managing Editor, News -- Electronic News, 7/22/2008

Don your helmets, because cuts to capital spending have put the IC industry on a “collision course,” according to the latest data from researchers at IC Insights.

According to the company, current spending plans by IC manufacturers worldwide will lower total semiconductor capital expenditures by 15% to $51.7 billion in 2008 from $60.9 billion in 2007. Capital expenditure estimates for 2008 have been sliding since the end of 2007, with projections in December calling for a 9% dip.

Overall, IC Insights expects fab capacity utilization to average more than 90% in 2008, up from 89% in 2007. In the first half, wafer fab utilization stood at 91% worldwide.  However, IC Insights noted that 300-mm fab utilization rates were at an extremely high level of 96% in the first half and pointed out that about 85% of all DRAMs and 32- and 64-bit microprocessors are now fabricated on 300-mm diameter wafers. 

“Considering the strong unit growth rates being seen in memory and logic ICs, there simply isn’t much wiggle room for additional cuts in capital spending budgets at most chipmakers, based on the latest analysis from IC Insights’ online Strategic Reviews database of semiconductor suppliers,” the company said in a statement today.
 
IC Insights said that based on its data it expects 2008 capital spending as a percentage of semiconductor sales to be only 18%, which would be one of the lowest ratios over the past 30 years. The company further pointed out that the capital spending cutbacks are occurring while IC unit volume shipments are forecast to increase at a healthy 8% rate in 2008.
 
“With a growing number of large IC companies outsourcing more products to foundries and major pure-play wafer foundries aiming to increase profitability by controlling capital spending, IC Insights believes the IC industry continues on a ‘collision course’ with respect to supply, demand, and average selling prices or ASPs,” the company said.

IC Insights first began noting the capital spending situation in December 2007, just before its 2008 McClean Report was published. At that time, the company warned that an 18% ratio would be the lowest since 2003, the year before the big boom year of 2004 in which IC ASPs increased 10%. 

Today’s statement from IC Insights reminds that tight supply conditions and rising IC ASPs are expected over the next five years and that capex as a percentage of semiconductor sales went from an average of 27% in the late 1990s to 21% in the early years of this decade. Moreover, IC Insights forecasted that capital spending as a percentage of sales will average only 17 to 18% between 2008 and 2012.

IC Insights projections are in line with Gartner Dataquest estimates focused on semiconductor manufacturing equipment and released just before Semicon West this month. Gartner cut its semiconductor capital spending forecast by an additional 2.6%, projecting a 22.4% decline in spending for 2008, with little upside potential currently visible for the near term given that all segments of the semiconductor manufacturing equipment market are reporting decreased spending plans. Gartner also noted an anticipated bursting of the capital spending bubble in memory markets, as well as continued uncertainty in the global economic picture.