by James Montgomery, News Editor

A roundup of midyear forecast updates for semiconductor sales, equipment sales, and capital expenditures indicates general agreement that 2006 will shape up to be a boon year overall, particularly in the first half of the year, and strongest on the equipment side. But growth this year will come at a cost, as the same analysts generally agree that 2007 looks to be downright gloomy (see charts, above).

“It’s the same scenario that happened in 2004,” said Robert Castellano, of the Information Network. The semiconductor industry overreached for the 50% growth in tool purchases it achieved that year, as chipmakers “went on a buying rampage” to avoid a forecasted slowdown in tool sales, and thus pulled in growth that was expected in 2005, he explained. “We see the same thing happening in 2006,” he said. “We’ve robbed Peter [in 2007] to pay Paul [in 2006].”

On the semiconductor side, iSuppli sees “a very strong resurgence” in standard linear analog ICs, due to healthy mobile phone sales and price hikes from suppliers to pass on rising materials costs. The SIA also pointed to impressive demand for cell phones as a big chip industry driver — approximately one billion cell phones will be sold worldwide this year, with an average semiconductor content of $41/unit, making the segment second only to PCs in terms of total chip consumption, according to SIA president George Scalise.

Memory ICs are also strong, led by flash (growing 27% this year); combined, flash and DRAM will generate total IC memory growth of nearly 15% this year, according to iSuppli, in its late-June update. Overall, rising average selling prices and lengthening lead times will create better growth in semiconductor sales than in electronic equipment end-markets, but look for a sluggish second half of the year due to weakening orders and rising inventories, noted Gary Grandbois, principal analyst.

Jim Feldhan, president of Semico Research, agreed that cell phone sales, particularly for high-end models, are doing very well, while the PC market (both desktop and notebooks) was “somewhat lackluster” in 1H06, although he thinks the segment “will do much better in the second half of the year.” But both Feldhan and Semico managing director Joanne Itow pointed to a “pretty dramatic drop” during April-May in the firm’s Inflection Point Indicator index, which forecasts the industry environment about nine months into the future — suggesting that a downturn is on the horizon for early 2007, somewhere around late 1Q or early 2Q. Cell phone sales are likely to keep going strong, and the notebook market should see good growth again next year, Feldhan said, but there will be increasing price pressures for cell phones as well as for both memory and processors, with a little bit of excess capacity on the memory side.

“I still believe that unit demand next year will be relatively OK, in the 9%-10% range,” Feldhan said. “But it doesn’t take much oversupply to throw prices in the gutter…we end up with 5%-6% excess supply, particularly in memory, that can wreak havoc on ASPs.” Given a combination of potential excess capacity coupled with other uncertainties — e.g., falling capacity utilization rates, weaker consumer spending (gasoline prices are back over $3/gal) — “I can easily see a scenario where ASPs fall 8%-10% in the course of a year, and [that will result in] your 3.5% growth,” which the firm is now forecasting for 2007, down from a Jan.1 projection of a robust 20%.

The optimism for 2006 — and pessimism for the following year — is even more pronounced for semiconductor capital spending and equipment sales. VLSI revised its forecasts in May to a 13% increase in equipment sales and 14.7% growth in capex — but the firm has already hiked its equipment sales forecast to 23%, “so the capex number may be too low,” said Aida Jebens, senior research analyst. “We think equipment growth is front-loaded, so perhaps capex is too.”

So far in 2006 there has been “tremendous” demand for tools, particularly in North America, according to SEMI, which now pegs the overall equipment segment at $38.81 billion, growing 18.0% from 2005, roughly double the rate SEMI forecasted in its year-end projections in December. Wafer processing sales are seen growing nearly 20% to $27.42 billion this year, almost triple the rate forecasted six months ago.

George Burns, president of Strategic Marketing Associates, agreed that US companies are well ahead of the pack this year in terms of capex ($16.4 billion, vs. $10.5 billion for Japanese companies, $10.3 billion in South Korea, and $9.5 billion in Taiwan). He sees “lots of new fab activity coming online this year” that will continue to support spending: Micron upgrading its 200mm fab in Singapore to 300mm, Intel opening its Fab 24-2 in Ireland, and IM Flash bringing up part of its two-module 300mm fab in Virginia. Overseas, fabs are also coming online from Matsushita and Sharp (both 300mm), as well as the first of Toshiba/Sandisk’s three 100,000 wafers/month capacity 300mm fabs due to open over the next two years — Fab 3, opening late this year or early 2007, is expected to cost more than $8 billion to build and tool up, Burns noted.

Next year he sees overall capex growth at about 10%, but that’s “iffy” due to fears about overcapacity, with a lot of new fabs coming online. The industry is right about at the same levels in terms of capital and equipment spending as in 2004, right before the inventory correction, Burns noted, and we’re in the ballpark of the previous peak year of 2000 as well.

With all the activity going on, though, most analysts caution that the good times won’t roll on much longer — and some are even predicting a slight downturn, starting early next year. Burns has slashed his 2007 capex estimate in half — “you’ve got to have a pause somewhere along the line in 2007,” he said. Other groups have similarly cut their outlooks for 2007. SEMI now expects total equipment sales to rise just 1.4% in 2007 to $39.36 billion, instead of a previously projected 12.3% increase. The outlook for wafer processing sales, as well as the catch-all “other” category, have been cut from 12%-13% growth to just about flat for the year, while the assembly/packaging segment will slip 1.7% instead of a previously forecasted 13.4% increase.

Likewise, Gartner also has turned its previously flat expectations for 2006 into an outlook for solid growth, and overturned its 2007 projection into single-digit negative territory. The firm sees 25% Y-Y growth in wafer fab equipment spending (mainly “significant investments” in NAND flash capacity), with a peak in 1Q07, and declining through the rest of next year, as chipmakers digest new capacity they’ve brought online. The packaging/assembly sector will see decent growth as well this year (17.5%), still dominated by Asia — and look for China to be the biggest individual consumer of packaging and assembly equipment by 2009, surpassing Taiwan, Gartner projects. Meanwhile, automated test equipment will grow roughly 29% this year, led by memory and system-on-chip testers.

But the numbers won’t hold up for long. DRAM and NAND flash will total more than 44% of all anticipated equipment spending, but only 22% of revenues, noted Klaus Rinnen, managing VP for Gartner’s semiconductor manufacturing and design research group. “This is way out proportion…this seems like a sure-fire road to potential overcapacity and future reductions in expenditure.” — J.M.

MIDYEAR FORECASTS

COMPARISON OF 2005 MID-YEAR FORECASTS VS. OUTLOOKS ON JAN. 1

Semiconductor forecast scorecard (% growth year-on-year)
…………………………………………………..2006…………………………2007…………………………………2008
………………………………………………..July (Jan)………………July (Jan)………………July (Jan)

Future Horizons…………………14.0 (20.0)…………19.0 (22.0)…………………6.0 (6.0)
Gartner Dataquest……………10.6 (7.6)………………8.9 (5.1)…………………14.0 (13.8)
IC Insights………………………………8.0 (8.4)……………10.0 (13.0)………………21.0 (23.2)
Information Network………………9.9 (7.6)……………10.6 (10.4)………………12.8 (10.5)
iSuppli………………………………….7.9 (6.7)……………12.4 (12.4)…………………7.5 (9.5)
Semico………………………………….12.4 (17.5)……………3.4 (20.4)………………15.6 (13.5)
SIA………………………………………….9.8 (7.9)……………11.0 (10.5)………………12.0 (13.9)
VLSI Research………………………8.8 (8.2)………………4.7 (9.1)…………………10.8 (6.9)

Chip equipment forecast scorecard
…………………………………………………..2006…………………………2007…………………………………2008
………………………………………………..July (Jan)………………July (Jan)………………July (Jan)

Gartner Dataquest……………16.6 (8.4)………………-3.3 (13.9)……………20.3 (27.3)
Information Network*…………17.5 (3.0)………………flat (23.5)……………18.9 (31.0)
SEMI……………………………………….18.0 (9.1)…………………1.4 (12.3)……………12.0 (15.4)
VLSI Research………………………23.1 (6.1)………………-3.2 (17.3)……………13.0 (6.8)
*frontend/wafer processing equip. only

Semiconductor capital spending
…………………………………………………..2006…………………………2007…………………………………2008
………………………………………………..July (Jan)………………July (Jan)………………July (Jan)

Gartner Dataquest……………16.6 (-0.4)……………-3.3 (9.9)………………20.3 (28.2)
IC Insights……………………………12.0 (5.0)………………10.0 (10.0)……………33.0 (40.0)
Semico………………………………….20.0 (12.1)………………7.0 (30.7)………………– (-9.3)
SMA………………………………………..15.0 (12.0)……………10.0 (22.4)………………– —
VLSI Research………………………14.7 (6.1)………………-4.1 (13.1)……………13.0 (7.6)