Record 2010 brings about capex boost: a bit of prudence may be in order

The year 2010 ended up being a record for semiconductor capital equipment spending, a welcome reprieve after 2009’s dismal numbers. According to Gartner, Inc. worldwide semiconductor capital equipment spending reached “$36.9 billion in 2010, a 122.1 percent increase from 2009 spending of $16.6 billion.”
Predictions vary about the capex growth that the entire industry will witness in 2011. Research firm SEMI predicts that total semiconductor capex will grow between 15 percent and 20 percent in 2011. Meanwhile, Semico expects that capex for the industry as a whole be more conservative at certain companies than it was in 2010 and will be up 15 percent in 2011 over 2010 totals. Finally, Gartner expects a softer 2011, when equipment purchases will focus more on capacity than technology equipment. The firm predicts that semiconductor capital equipment spending will grow 4.9 percent in 2011 from 2010.
While the total industry-wide expenditures remain uncertain — especially with the events in Japan — some companies will certainly spend incredible totals in 2011, reaching historic record levels. For example, top pure-play foundries GlobalFoundries and TSMC announced major increases for their capex spending plans. GlobalFoundries plans to double its 2011 budget from $2.7 billion to $5.4 billion, an increase of 96%. Meanwhile, TSMC plans to boost its spending 32% from a record of $5.9 billion 2010 to another record of $7.8 billion in 2011. Samsung also plans to increase total capex (including its R&D) by 18%, from a record in 2010, to another record $9.2 billion in 2011. Other companies, such as STMicroelectronics, Hynix, Micron, Infineon, and SMIC, have also all increased their expenditures for this year (although not to record levels).
Perhaps most significantly are the increases in spending from semiconductor leader Intel. The giant is planning to boost its capex from $5.2 billion in 2010 to an incredible $9 billion in 2011, and also improve R&D spending to $7.3 billion, as it comes off the most profitable year in its entire history. This came on the heels of the announcement in October 2010 of investments ranging between $6 billion to $8 billion to deploy its latest 22-nm manufacturing process across four existing US factories, along with construction of a new development fab in Oregon. This is obviously to meet the current demand for its Atom processor found in a breadth of tablets running different operating systems. Indeed, the explosion of popularity for tablets remains the lynchpin in Intel’s 2011 plans. But it may still be too early to tell if tablets end up experiencing the same trajectory as the netbook, peaking after just a year or two of stellar sales. Even so, the constant threat of overcapacity and inventory overstock remains even more threatening.
A big upswing in capital spending, and the overcapacity that typically follows, was a familiar theme during the recession in some other IC market segments, such as DRAM and flash memory. If the current trends hold an overcapacity situation, especially within the foundry business, which would lead to excess capacity and lower per-wafer revenues may in fact arise again by the end of next year. Klaus Rinnen, the managing vice president at Gartner, further explains that “Companies should also prepare business plans for the next equipment down cycle, starting in late 2012, because memory companies will have over invested, thus generating excess equipment.”
In some respects, the increased capital spending among the foundry suppliers, in particular, is now needed to accommodate the ever-growing number of semiconductor players that are migrating to the fab-lite/fabless business model. But, even with this in mind, a bit of prudence may be in order. If the recession has taught the semiconductor industry anything, it is that over confidence in potential demand can have disastrous results.