Total expected to be second highest on record

IC Insights, a market research firm in Scottsdale, Arizona, recently altered its 2006/2005 worldwide semiconductor industry capital spending forecast, increasing its figures 6 percent, to +10 percent. This past January, the company released a forecast expecting the spending in the industry to increase by only 4 percent.

As shown in the accompanying chart, the total semiconductor industry capital spending is now forecast to be $50.4 billion this year, second only to the $60.3 billion spent in 2000.

In 2004, semiconductor capital spending increased 53 percent, and represented the peak market growth year in the current industry cycle. Although 2006 semiconductor industry capital spending is expected to increase by just 10 percent now, it would still be the highest growth rate in the second year after the cyclical peak year in any previous industry cycle.

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In 2005, semiconductor capital spending represented only 20.2 percent of semiconductor sales, which totaled $227.5 billion. Using IC Insights’ forecast for an 8 percent increase in the 2006 worldwide semiconductor market, to $246.7 billion, and its forecast for a 10 percent increase in capital spending, to $50.4 billion, capital spending as a percentage of semiconductor sales is expected to rise to only 20.4 percent this year. In contrast, capital spending as a percentage of semiconductor sales reached 32 percent in 1995 and 30 percent in 2000, two periods of severe overcapacity buildups, the company states.

IC Insights believes that, in total, the IC industry will not build an excessive amount of capacity in 2006. However, overcapacity in individual IC product segments, like flash memory, is still a potential problem. With significant spending by new competitors (for example, the Intel/Micron joint venture, IM Flash) coupled with aggressive spending by existing players (Samsung and Toshiba/SanDisk, for instance), the flash memory segment appears to be at risk for overshooting its capacity requirements in late 2006 or early 2007.