Dataquest: It’s all about demand

Murmurs of when semiconductor manufacturing demand will pick up can be heard throughout the industry. As semiconductor equipment manufacturers continue to cut capital spending and excess capacity remains a top concern, the industry’s banking on the demand half of the supply and demand cycle to accelerate – and soon.

“The underlying assumption everyone makes is that demand will be improving. The question is when,” Klaus Rinnen, analyst for Gartner Dataquest, told WaferNews. “There is a widening gap between supply and demand. How fast can we burn off excess capacity?”

In a recent research brief, Dataquest said overcapacity will discourage growth prospects for the chip industry in 2002, which will limit growth to only low double digits. For wafer fab equipment, the firm expects 2002 to bring a second year of contraction. This view appears to be in contrast to general expectations in the equipment industry, Rinnen added.

The San Jose research firm said that despite cutbacks by semiconductor manufacturers, capital spending still remains too high, which will result in continued overcapacity in 2002. According to the research firm, the concern results from the absolute magnitude of spending in 2001 and the lag time for shipped equipment to become productive.

Capital spending should be at a minimum in 2001, Rinnen said, mainly driven by upgrades and technology investments. This required maintenance level of capital spending means that spending could shrink by about 50% in 2001, returning to 1999 levels.

“2002 will bring recovery, but there is a risk that we are in overcapacity and it depends on rates and the pick up of demand and the return to profitability which will return to sustain in profitability on investments,” Rinnen said. “[There is a] 70% utilization in 3Q, how fast can we move out? How long will it take? Will it be a quarter? I’m doubtful about that. It will be a while for us to meet the 85% utilization industry.”

Dataquest forecasts utilization to recover to the 85% level (required for a sustainable capital spending recovery) in 2H02. Assuming chip demand continues to grow and profitability returns, the market research firm said capital spending should bounce back before the end of 2002 — although it still expects 2002 to be the second year of spending contractions. Despite this, Dataquest believes next year will bring gradually improving industry conditions and the turn for the next upcycle, albeit late in the year.

“We need to make sure that utilization will not overheat. I’m not arguing with a bounce — we are forecasting that as early as 4Q, but is it sustainable long-term? That’s the question we’re really asking,” Rinnen said. “The need for new capacity and profitability is what you need for stability. Even though we have a negative number for next year if you look at the makeup of 2002 to 2001, this year is on the path to recovery. It’s a reversal of the trend we saw this year. It should bring the return to better business conditions,” Rinnen said.

— Christina Bruns, WaferNews associate editor


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