There’s something afoot in the IC industry, said Bill McClean, president of IC Insights, and that something has to do with overcapacity and capital spending. Although he expects a bounce in the chip market in the second half, he sees a longer term problem developing.
McClean spoke recently to a group of about 180 people gathered at the Semiconductor Equipment and Materials International’s New England Breakfast Forum in Burlington, MA. The IC industry is in the midst of a change right now, said McClean, pointing to the fact that between 1970 and 1995 there was only two years of negative growth. Between 1996 and 2001, however, there have been three negative years out of six.
“It’s not business as usual,” said McClean.
The issue, he said, is one of simple supply and demand. There’s too much overcapacity at the chipmaking level, and plans continue to increase capital spending to further increase capacity, said McClean.
From 1995 to 2001, he said, chipmakers’ capital spending totaled $250 billion. During that same time period the cumulative increase in the market was only $60 billion.
“There’s too much capital spending being done in the industry,” said McClean, adding that he understood that capex increases were good news for equipment and materials companies. “[Chipmakers] need to actively cut back more.”
2000 was the year that exceeded all averages, including a capital spending average increase of 82% – “a wonderfully horrible number,” said McClean. That number’s not real, McClean stressed, and a return had to be made to the 17% average. That’s the downturn of today, said McClean.
“You will come back [to average],” said McClean. “You’re paying for it now.”
In addition to overcapacity at existing fabs, said McClean, fabs coming on-line soon – particularly in China – will continue to drive up capacity, increasing supply and decreasing the IC ASP, which now stands at a low $1.90, compared to $2.68 in 1995. Next year will likely see a 4% increase in worldwide capital spending, said McClean, up from negative levels of this year. IC firms need to cut back even further from that 4%, he said.
“There will probably be $4 to $5 billion of capital spending for the Chinese – that alone could shove this into the positive,” he said, noting that the 300mm fabs around the corner worldwide will also increase overcapacity.
A large part of the problem, added McClean, is that most of the foundries are following an old report that predicted that IDMs would outsource 50% of their IC production. But the IDMs aren’t cooperating with that outdated report, said McClean. Instead, both the IDMs and the foundries are ramping up capacity, planning to supply all the necessary chips and adding to the general problem.
In the past, he’s told IC companies to spend aggressively in a downturn to increase their market share in the upturn, McClean said.
“The only problem is if everybody does it, it won’t work,” he added.
While inventory surplus is a problem that generally takes a mere six months for correction, said McClean, overcapacity is an 18-month problem that doesn’t go away easily.
In general, he expects sequential growth in the third and fourth quarters of this year. In fact, he said, Q4 may be “surprisingly good.” Looking ahead, he is confident that average system sales will increase at a 7-8% annual rate over the next five years.
— Matt Wickenheiser, SST News Editor