Gartner trims equipment capex outlook for 2006, improves 2007

by James Montgomery, News Editor

New figures from Gartner Inc. point to slightly lower-than-expected growth in semiconductor capital spending and equipment purchases, particularly for some backend segments, but the outlook for 2007 has improved somewhat as well.

The Stamford, CT-based firm now projects 2006 semiconductor capital spending will total $54.56 billion, representing 15.1% growth vs. the 16% growth Gartner forecasted in July. For 2007, the firm’s improved outlook calls for flat capital spending (0.1%), instead of a 3.3% decline, totaling $54.49 billion. The firm expects a rebound in 2008 (18.4%, less than July forecast’s 0.3%), followed by two years of contraction in 2009 (-5.1%) and 2010 (-2.0%), and a 14.2% rebound in 2011.

Comparing Gartner’s new capital expenditures forecast with its projections in July shows a few modifications. For semiconductor capital spending, the firm essentially has moved $800 million out of its estimates for 2006, and put an extra $1 billion into its 2007 numbers. “As we move into 2007, basically we’re looking potentially at factories being built, more than semiconductor equipment being purchased,” explained Dean Freeman, Gartner research VP, pointing mainly at Taiwanese memory firms PowerChip, ProMos, as well as Toshiba with its newest 100,000 wafer/month fab.

Freeman said that memory demand is still “really quite strong” right now, with a tight supply/demand balance swinging about 4%-8% either way, as companies “add supply at the same time as they’re pulling it out.” Memory spending is still relatively out of whack, with capex declining only to ~43% of sales next year, he said, but as huge amounts of capacity go in, by 2008-2009 that should drop to more normal levels of ~35%. “We see right now there’s fairly robust demand [for memory], because we see capacity coming online,” Freeman said. “But demand appears to be getting sucked up as it’s being built.”

Equipment spending is projected to stay strong at 23.5% in 2006, totaling $41.92 billion — but again, Gartner has pulled ~$600 million out of its total for the year, and tacked on ~$350 million to moderate a slowdown seen in 2007. Gartner’s new estimates show a -2.7% decline in equipment spending in 2007, vs. earlier projections of a -4.5% decline. A forecasted rebound in 2008 is seen to be a little weaker than previously thought (23.3% to $50.30 billion, vs. 24.5% growth forecasted in July), as is a downturn the following year in 2009 (-10.5% to $45.02 billion, instead of -9.5%).

Semiconductor capital equipment bookings have surged this year as chipmakers quickly add capacity, but there are a number of concerns, according to Klaus Rinnen, managing VP for Gartner’s semiconductor manufacturing and design research group, in a statement. He pointed to increasing chip inventories and a “strong potential for oversupply in both flash and DRAM if an increase in demand does not materialize,” as well as the continued gulf between steady growth in semiconductor revenues and the more volatile equipment spending growth. “Combined, these conditions create a scenario that could lead to a slight correction next year,” he said.

Gartner sees wafer fab equipment revenues rising 24.6% this year, thanks to high utilization rates (total in the low-90% range, and 97% for leading-edge capacity). However, these rates are expected to drop in 2007 (though still at around 90%) as new capacity comes online and customers absorb their shipments from 2006, resulting in slowing demand for additional capacity.

Equipment investments for backend operations seem to be more volatile in Gartner’s newer forecast, and Freeman explained that the packaging/assembly segment saw a buildup of package inventories in 1H06 resulting from environmental concerns (ROHS, lead-free, etc), but it appears that supplies have come back down.

From mid-2005 through 1Q06, the packaging and assembly equipment segment remained strong due to improving industry utilization rates, but PAE sales saw a significant decline starting in 2Q06, and end-user device demand will soften through the end of this year. Gartner called PAE tool demand “a bit murky at this point” as some semiconductor assembly and test services (SATS) suppliers take a more cautious, wait-and-see approach.

Demand for automatic test equipment (ATE) remains robust in 2006 (27.4% growth to $4.81 billion), fueled by demand for memory and system-in-package testers. But the ATE segment has also seen weakening orders in the latter half of 2006, although there are pockets of demand, with utilization rates for some segments still high, e.g. for LCD drivers. Like the other equipment segments, the ATE segment will also see a slight dip in 2007 (-1.7%), and will surge again in 2008 with nearly 30% growth. — J.M.


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