March 17, 2006 – Semiconductor industry capital spending was expected to be flat to slightly up in 2006, but unexpectedly strong investments from chipmakers have caused another analyst firm to raise its capex forecasts to 10% growth in 2006.

IC Insights has hiked its capital spending outlook for 2006 to 10%, from 4% in its year-end analysis. That suggests total spending of $50.4 billion this year, second only to the $60.3 billion spent in the boom year of 2000. It also would be the highest growth rate in the second year after a cyclical peak in any previous cycle, the firm noted.

The increased spending this year will be lockstep with a projected increase in sales, noted the firm. In 2005, capital spending represented 20.2% of total semiconductor sales ($227.5 billion). Assuming the firm’s 8% chip sales forecast and new 10% capex growth, in 2006 that capex/sales ratio will barely rise to just 20.4% — vs. a high of 32% in 1995 and 30% in 2000, previous periods of severe overcapacity buildups.

IC Insights believes there won’t be an excessive amount of overall capacity this year — although individual segments such as flash memory could run into problems. A spending splash from new competitors (e.g., IM Flash, the Intel/Micron JV) and aggressive spending from existing players such as Samsung and Toshiba/SanDisk could put that segment at risk for overshooting capacity requirements in late 2006 or early 2007, the firm cautioned.

Last month, Gartner Inc. likewise adjusted its outlook for 2006 and beyond, citing recent plans from chipmakers increasing their capital spending budgets. Semiconductor capex growth, originally predicted to be flat year-on-year in 2006, also was hiked to 10% growth. Sales were adjusted slightly upward, to 9.5% growth in 2006 and 7.6% in 2007.