2008 capital spending to shake IC industry foundation, IC Insights reports
By Ann Steffora Mutschler, Senior Editor -- 12/4/2007
Tying two seemingly unrelated situations together, market research firm IC Insights called attention to the fact that both General Motors and Ford Motor Co. said this year they would cut back fleet sales, while in October, semiconductor foundry United Microelectronics Corp. (UMC) said in its Q3 financial report that its 2008 capex would be lower than 2007 to focus on increasing profitability.
What ties these situations together, in IC Insights’ opinion, is that an increasing number of companies in the automotive and semiconductor industries have reached their “pain threshold” for pricing pressures and low profit margins. In both cases above, the companies are willing to sacrifice market share gains in order to achieve higher profits.
Specifically in the automobile world, fleet sales are an extremely low margin business and it seems clear that GM and Ford have reached the breaking point where they would rather walk away from selling tens or hundreds of thousands of automobiles to rental car companies, and lose unit market share to their competitors, than to continue in this low margin segment, the firm noted.
Although the firm highlighted UMC’s increased emphasis on profitability, this message has been delivered by an increasing number of companies throughout the semiconductor industry: other major IC foundries and many DRAM producers are expected to follow UMC’s example, at least for 2008, the firm says.
Since 2004, semiconductor companies, in total, have essentially stuck by the budget levels they announced early in the year, with the notable exception to this trend being the DRAM and flash memory suppliers spending surge, to more than 40 percent increases in each segment, in 2006, the firm said.
Although total semiconductor industry capital spending is forecast to increase 3 percent this year, Samsung is expected to increase its spending by 22 percent to an astounding $8.33 billion, and, in fact, Samsung’s capital spending as a percent of sales level is expected to be 41 percent in 2007, about twice the industry average ratio of 22 percent.
Even with Intel lowering its capital spending budget by 15 percent for 2007, Intel and Samsung are collectively expected to represent about 24 percent of worldwide semiconductor capital expenditures this year, and given the importance of these two companies, IC Insights said semiconductor equipment suppliers are waiting with great anticipation for Intel and Samsung to announce their 2008 spending budgets.
Next year, the firm forecasts total semiconductor industry capital expenditures to decline by 9 percent to $51 billion.
As of today, the two largest semiconductor industry capital spenders—Samsung and Intel—have not yet released their 2008 capital spending guidance, and depending on what these giants budget, IC Insights believes the total 2008 industry-wide capital spending level could be about ±4 percentage points from the current forecast of -9 percent.
Therefore, it appears that the best-case scenario for semiconductor industry capital spending in 2008 is -5 percent, with the top five spending cutbacks in 2008 expected to come from major DRAM suppliers—Micron, ProMOS, Samsung, Hynix and Nanya, the firm said.
After increasing total spending for DRAM by 44 percent in 2006, the DRAM suppliers “paid” for this overspending with a price collapse in 2007, IC Insights pointed out. Heading into next year, the firm believes many DRAM suppliers have collectively come to the conclusion that big spending cutbacks are needed to restore some sanity to DRAM ASPs next year.
Finally, for 2008, IC Insights predicts a 10 percent increase in the semiconductor market and assuming this growth takes place, the semiconductor capital spending as a percent of sales ratio for next year would be only 18 percent, down from 22 percent this year.
An 18 percent ratio would be the lowest since 2003, the year before the big boom year of 2004 in which IC ASPs increased 10 percent.
Overall, the industry-wide capital spending as a percent of sales ratio is continuing to trend downwards and is likely to reside in the “high-teens” range during the latter half of this decade, IC Insights concluded.
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