Privacy groups could slow down RFID chip growth

The optimism surrounding Wal-Mart’s June announcement that strongly encouraged its top 100 suppliers to start using radio frequency identification (RFID) tags by 2005 (see WaferNews, V10n24, June 16, 2003) may have been premature. Privacy groups in both the US and Europe are organizing efforts against the use of RFID chips in retail applications and threatening development of this exciting new market for semiconductors.

The latest salvo from privacy activists came from the new director of a London-based group called Liberty. On September 1, the director announced that the group will monitor experiments being conducted by various retailers on the use of RFID technology. In addition to its monitoring activities, Liberty also is considering legal challenges to stop RFID experiments by retailers.

Action by such groups has already proved to be a formidable force against retail use of RFID technology. Earlier this year, Italian clothing manufacturer Benetton announced plans to insert RFID chips into its products. But a group called CASPIAN (consumers against shipping privacy invasion and numbering), which was started by a doctoral student at Harvard University in Cambridge, MA, called for a worldwide boycott of Benetton products. The clothing retailer quickly retreated, issuing a public statement that said no chips were present in the more than 100 million garments it has produced worldwide, and that it would analyze all aspects of using RFID technology, “including careful analysis of potential implications relating to individual privacy.”

In another aborted attempt to test RFID technology, Wal-Mart cancelled a “smart shelf” RFID test program that it had planned to conduct at one of its stores in Brockton, MA, in conjunction with Gillette Co., the razor blade manufacturer. But after the head of CASPIAN walked into the store and photographed a store shelf that contained RFID technology that would track the Gillette products, the test was abruptly cancelled. Wal-Mart claimed it cancelled the project because RFID wasn’t ready for tracking of individual store items, but the timing appears to be more than a coincidence.

Chipmakers are likely to closely watch these developments. Public concern and activism against RFID technology could cast a chilling effect on RFID research and delay–or even kill–development of this exciting new market for semiconductors.

— Kevin Fitzgerald
(September 17)

Putting the Squeeze on Probe Technology

The new low-k materials not only pose integration headaches for equipment suppliers and IC manufacturers, but also for those who test the die. With their threshold to cracking and structural failure an order of magnitude lower than traditional dielectrics, the fragile dielectric materials pose hazards during probing.

The European initiative to get the lead out of solder also impacts probe technology (e.g., harder materials transfer more of the probe force to underlying circuitry). Additionally, increasing pin counts affect wafer level test: finer pitch bump layouts on the order of 200-micron for high-density flip chip devices are currently being used, but the industry is moving toward 175-micron.

To address these concerns, FormFactor recently introduced the BladeRunner175 (BR175) wafer probe and currently is shipping it for production sort test. The probe can be scaled to meet the future 175-micron pitch requirement. According to Mark Brandemuehl, VP of marketing, at FormFactor, results presented jointly by TEL, Intel, and FormFactor at the Southwest Test Conference (6/03), indicate a 10:1 reduction in probe force using the BR175 vs. previous generations of the company’s probes as well as Cobra-type vertical probe cards made by others.

Brandemuehl noted that scrub ratios — the ratio in movement in the X/Y direction to movement in the Z direction — ranged from 0.0 to 2.0. Contact resistance was in the range of 0.15ohms to about 0.24ohms.

–staff report
(September 10)

Mood is Decidedly Upbeat at Semiconductor Investment Conference

Both speakers and attendees at a recent conference on semiconductor industry investment were optimistic that the industry is ready for recovery, but not all agree on the timing or the scope of the recovery.

The conference, “Investing in the Semiconductor and Semiconductor Equipment Industries,” was held in New York City on August 25 by The Wall St. Transcript, and was co-sponsored by WaferNews. Speakers provided an overview of the state of the industry as well as profiles of several companies.

“Recovery is not yet in sight, but it’s on the horizon,” said Dan Scovell, VP at Needham & Co., Inc., an investment banking firm that tracks the semiconductor industry. Scovell’s remarks were actually more pessimistic than those of other speakers, several of whom believe that recovery has already begun.

“The recovery in technology spending will have a compelling slope,” said Arnie Berman, chief investment officer/technology strategist, Soundview Technology Group. “The recovery in tech stock can have a compelling slope, too.”

Berman believes that institutional investors do not take advantage of the cyclicality of the electronics industry. He described a “domino principle” by which a small improvement in global economic conditions ripples through the electronics supply chain, creating “disproportionate” changes in spending at each affected link in the chain, and finally producing a disproportionate change in the “top lines of hardware companies and component suppliers.”
By this principle, Berman said, “cyclicality and operating leverage of the tech sector becomes a virtue. But institutional investors are not prepared for this.”

Berman has a bullish outlook. He believes that return-on-equity (ROE) and pricing have hit bottom, and that the industry is poised for very strong recovery. “Consensus models are saying the slope (of the recovery) will be shallow, but I think recovery will be steeper than suggested,” he said.
He also added that “today’s supply/demand dynamic has more in common with the conditions that set up the ’94/’95 boom than the cyclical upturn of ’99/’00.”

Doug Andrey, director of information for the Semiconductor Industry Association (SIA), said that he believes that the PC market, still the main consumer of semiconductors, will drive solid growth next year. “There is some corporate upgrade buying going on right now,” said Andrey. “People are raising
their PC forecasts, and it’s likely we could get low double-digit growth for PCs in ’04.” He pointed out that the PC market was up 8% in 2Q, but “year-on-year shipments into the channel were only up 3%. Inventory was bled out of the channel.”

“Signs of end market recovery are emerging,” agreed Ed White, managing director at Lehman Brothers. White pointed out that “equipment orders appear to have bottomed out,” and that both the PC and wireless end markets are showing momentum. He also pointed to Intel recently raising
its guidance to investors as a very positive sign for the industry (see story on page 3 Wafer News).

White cited several reasons why this recovery may be particularly strong for equipment makers: Chipmakers will have to compensate for what he sees as “underspending on leading-edge technology,” equipment companies have lowered their operating costs and now have “substantial operating earnings leverage,” equipment companies will seek out new sources of revenue growth in the recovery, and chipmakers continue to push the technology envelope, with development work at 65nm to 45nm now underway.

White identified some of the new revenue sources for equipment makers: consumables, such as spare parts, slurries, polishing pads, sputtering targets, and chip packaging materials; services, such as engineering support, process support, outsourced maintenance, used equipment, and equipment
leasing; and the making of new equipment, such as that used for producing flat panel displays and nanotechnology equipment. White said that equipment makers have adopted new manufacturing strategies that will serve them well during the recovery. These strategies include outsourcing,
the transfer of production to low-cost areas such as Asia, reduced cycle times which will minimize inventory and its costs, and “ship from cell,” an approach by which major equipment assemblies and components are shipped to the customer’s plant for final assembly. White said that while the consensus is for a slow, mild recovery, “our forecast is a little more aggressive.” He targets equipment growth in the ’04/’05 time period at a staggering 30%.

–Kevin R. Fitzgerald
(September 3)

Old chip market metrics drawing fire

WaferNews editors have received a flurry of reported orders in the past month, providing more evidence that a market upswing is about to arrive. But is the widely used practice of looking at new orders as a barometer for predicting the chip market’s health losing favor with Wall Street?

Investors and analysts have long viewed order momentum as a compass for gauging the chip market’s direction. An uptick in orders signifies market growth, while a decline indicates sluggish times ahead. Historically, this correlation has borne out to be true.

However, a recent article from Dow Jones highlights a research note by Mark Fitzgerald, an analyst at Banc of America Securities, in which he directs investors to focus less on order volume and more on traditional stock valuations such as cash flow and earnings. Over the long run, according to Fitzgerald, chip equipment stocks will be valued more like cyclical stocks, where peak earnings and cash flow are more accurate measurements of the industry’s health. “If we are correct about the secular changes in the semiconductor industry &#8212 slower growth, lower profitability, no new applications &#8212 then semiconductor equipment order momentum has little value as a stock metric,” he said.

Richard Tortoriello, an analyst at S&P Equity Group, agrees with Fitzgerald’s assessment. With a prolonged slide in the chip market and smaller, more expensive chips coming to market, it makes sense to value stocks based on cash flow and earnings rather than orders, he said.

Others, however, continue to believe that order growth is a benchmark for the semiconductor industry. “Of all the industries that I follow, I would say semiconductor equipment is the easiest to follow because of the fact that they do give you those orders,” said Daniel Morgan, portfolio manager at Noble Financial Group in Boca Raton, FL, and a long-time investor in Applied Materials. “Other industries tend not to give that clarity.”

For those tracking semiconductor equipment manufacturers, order momentum is a particularly useful thermometer in gauging the market’s health, according to Dan Tracy of SEMI. Orders provide a good perspective of the industry’s movement towards expansion and future capacity, he says &#8212 i.e. equipment makers’ bread-and-butter. Tracy said he’s also seeing a pick-up in orders in recent weeks, particularly from Japanese equipment manufacturers. Capex from Korean companies (e.g. Samsung) are also showing noticeable gains, he said. Orders in Taiwan are weaker than elsewhere, he noted, because foundries are cautious, and want to see more demand before making further investments in capacity.

–James Montgomery
(August 27)

Japanese equipment numbers on the rise

Based on the latest semiconductor equipment sales figures from the Semiconductor Equipment Association of Japan (SEAJ), that country is poised to lead a strong rebound in the equipment market.

Global sales of Japanese-made equipment were 80.81 billion yen ($676.9 million) in June, a big jump from May sales of 47.84 billion yen ($400.7 million) and a 33.7 percent increase from June 2002. Domestic sales spiked to 51.80 billion yen ($433.9 million) &#8212 the highest since March 2003, and second highest in the past 12 months &#8212 representing a 75.6 percent jump from May and a 52.1 percent increase over June 2002, according to SEAJ.

Japan’s global equipment orders in June totaled 91.48 billion yen ($766.3 million), up 6.3 percent from the same month in 2002, but down from 98.84 billion yen ($827.9 million) in May 2003, the SEAJ reports. Domestic orders in June were 66.24 billion yen ($554.8 million), a slight dip from May 2003 but a 92.7 percent increase from June 2003.

The worldwide book-to-bill rocketed to 1.57 in June, compared with 1.04 in May, and doubling April’s mark of 0.78. A book-to-bill of 1.57 means that $157 in new orders was received for every $100 of product billed for the month. Domestically, the book-to-bill was 1.71, up from 1.43 in May and 1.29 one year ago.

–staff report
(August 20)

SIA: 2Q chip sales show healthy jump

Worldwide chip sales hit $37.6 billion in 2Q, up 3.2 percent from 1Q03, and up 10.4 percent from 2Q02. Semiconductor sales totaled $12.54 billion in June, up 0.4 percent from $12.49 billion in revenues in May 2003, according to data from the Semiconductor Industry Association (SIA). The May figures were revised downwards slightly from SIA’s earlier estimates of $12.50 billion.

Sales were up significantly in nearly every segment. Sales of programmable logic and standard cell chips increased 27.5 percent and 15.7 percent in June, respectively, due to consumer use of broadband services. Growing demand for DVDs and DVD recording capabilities drove a 33.9 percent jump in optoelectronics sales, while digital camera and mobile phone demand fueled a 37.1 percent leap in flash memory sales.

SIA President George Scalise highlighted strong growth in the computational, consumer, and communications sectors. Year-on-year sales of computers were up nearly 8 percent &#8212 the strongest growth in three years &#8212 contributing to an 8.2 percent growth in microprocessor sales.

Doug Andrey, principal industry analyst at SIA, said that an approaching PC upgrade cycle is likely the cause of the boost in computer sales, the largest market for semiconductors. “A lot of PCs were bought in anticipation of Y2K,” when the typical corporate desktop life was two years, he said. During recent economic woes, businesses have been squeezing four to five years out of their aging desktop machines. At this point, it’s often cheaper to simply replace the entire PC than perform incremental upgrades. Andrey said he expects this trend to pick up by the end of 2003.

Geographically, the Asia Pacific region grew the most on a quarter-by-quarter basis, up 5.9 percent, followed by Japan (5.3 percent) and the Americas (3.6 percent). A 4.1 percent decline in European sales was attributed to a sluggish economy and continued outsourcing of production to Asia.

Capacity utilization was at approximately 88 percent for 0.18-micron technologies, and up to 95 percent for “leading-edge” 0.15-micron technologies. “Now that inventory has been worked off, increasing demand as the year progresses will directly generate rising semiconductor sales,” said Scalise.

–staff report
(August 13)

Equipment makers will be sold out next year, says Future Horizons

Healthy semiconductor demand should catch up to supply by year’s end and finally start pushing average selling prices up, predicted Future Horizons at its midyear update seminar July 29, in London. Equipment sales should jump 50 percent next year, as chipmakers will buy all the tools they can get.

The forecasting firm from Sevenoaks, Kent, U.K., now figures semiconductor sales will see 13 percent growth in 2003, not the 18 percent it originally predicted back in January. Unit growth of ICs will still be 18 percent, but a five percent drop in ASPs will cut the dollar value. “We were high in January,” said Future Horizons Chairman and CEO Malcolm Penn. “We’ve come down a little bit because of falling ASPs, while the other forecasts are gradually creeping up. Unit demand is twice as strong as anybody predicted &#8212 and that’s in spite of war, pestilence, and everything else in the first half.” The company’s projections for the first half were within one percent of actual market demand.

Though the company’s presentation materials showed an increase in equipment market growth to 10 percent for 2003, from the 0 percent it forecast in January, Penn says that’s mostly because he underestimated the drop off last year. “No one is going to buy much of anything this year,” he notes. “Equipment people still have another six to nine months to go.” For 2004, however, Future Horizons projects 55 percent growth in tool sales &#8212 but thinks the real limit will actually be how much the equipment companies can produce.

“Semiconductor demand is much stronger than people think, so it will eat into capacity much faster than people think,” says Penn. Once capacity is tight, ASPs will head up. Add increasing prices to current healthy unit growth, and the industry will suddenly look like it’s booming. Chipmakers will have money to spend again and will be eager t