by Bob Haavind, Editorial Director
Three top investment analysts speaking at a SEMI breakfast near Boston on Sept. 27 outlined somewhat divergent scenarios about whether the current upsurge in tool orders will continue through next year. What they did agree on was that the buying cycles are moderating, and that the result may be an improved outlook for investors, both private and public, in this industry sector.
The case for caution was presented by James Covello of Goldman, Sachs. He pointed out that annual growth in semiconductor markets had slowed to the 6% range over the past 10-12 years even though growth in units continued at the 10% pace it has maintained for 20 years. The reason, he said, lies in lower average selling prices (ASPs), and he doesn’t see depressed pricing abating in the near future. He believes that there have been four quarters of chip production 10%-11% above the growth trend line, depressing ASPs, and that’s why a few chipmakers have negatively pre-announced in the last quarter.
Emerging end markets have been cited as a reason for increased chip demand and higher prices, but Covello said that there have been numerous new applications beyond PCs without pushing chip unit growth above the historic trend line, and he doesn’t see that happening now. While some of have been predicting another 6% increase in tool orders next year, he suggested that there may actually be a 2% decline.
“Don’t expect any spike back up in the near term,” Covello commented.
Taking the contrary view was Edward White of Lehman Brothers, who explained that there has to be some inventory growth when markets are going up strongly, as they have been recently. For toolmakers, billings are up 13% in 2006 compared to 2005, but bookings are up 55%, spurred by been a buildup in flash memory capacity and DRAM capacity in Taiwan. He expects both to continue strong in 2007 as Taiwan converts much DRAM capacity to 300mm while moving 200mm fabs to more trailing-edge products.
White conceded that some analysts believe that overcapacity is developing in memory, especially NAND flash, but he disagreed. He believes that flash provides the “perfect memory” that has been sought for several years, providing nonvolatile, fast access, large- capacity compact storage — not just for memory sticks and iPods, but perhaps soon for notebook computers as well.
White noted that recent computers have extra storage in anticipation of the coming of Vista from Microsoft next year, for which 1GB of memory is recommended — but beta users have been suggesting that good performance will require close to 2GB. This will spur demand for DRAM along with NAND flash, which also might replace CD-ROMs, he added.
Taking the middle ground was Stuart Muter, RBC Capital, who doesn’t see any precipitous drop-off in tool orders for the next six months at least. He feels that cycles are increasing in frequency while staying more muted in amplitude, along with a seasonal factor.
One reason is that the whole semiconductor industry has a desire to keep a better balance between supply and demand. On the equipment side, lead-times for tools are much shorter and installation is much quicker. In addition, some chipmakers can now add slices of capacity, perhaps 3000 wafer starts/month at a time, as they need it.
This smoothing of the cycles should improve investor perceptions over the next ten years, he believes, helping the stock prices and bringing in more private as well as public equity. He thinks that cash flow and earnings will drive investment in this climate, rather than a heavy dependence on order books as in the past. While some have feared that a buildup in China could upset markets and bring down margins, Muter pointed out that even there, capital spending has remained rational in the recent past.
White agreed that chipmakers are exercising restraint in adding capacity, citing the term “capital avoidance” as one of the favorite phrases heard from fab managers. But he also says they are big on return-on-investment capital, trying to leverage infrastructure while spending a lower percentage of capital on buildings and more on tools. While they may want to make new, more advanced chips without buying new equipment, they can’t achieve goals for speed, performance, and productivity without expanding their tool base.
Strong growth in the industry depends on applications requiring the most advanced silicon processed with leading edge tools, and over the past five years White believes only PC gaming has been pushing the envelope. He does not see a new “killer app” on the horizon, but still he believes there will be two strong drivers in 2008 — consumer mobile and wireless technology. The proliferation of these capabilities will call for lots of new leading-edge devices.
“There is a lot of activity under the radar,” White suggested.
The transition to 45nm will also be underway in 2008, and it will take major advances in materials, processes, and tools to get there, he said.
There was considerable discussion of cell phones as a continuing growth market during the Q&A after the talks. Covello pointed out that cell phones have maintained a >10% growth rate for ten years, and he expects this to continue. One reason, he said, is that studies show that even in developing countries the replacement rate for handsets is similar to that in the industrialized world, where replacement every nine months is not uncommon.
White explained that to maintain the proliferation of electronics in the developing world, it was necessary to continue pushing Moore’s Law to be able to provide more functions at reasonable cost. In the developed countries, he suggested that the service providers have been instrumental in keeping the replacement cycle short. “When you go back to them,” he explained, “they will give you a new cell phone free or at a deep discount.” These replacements offer more features based on added silicon content, he added.
Muter pointed out that in Asia the cell phone has become a fashion accessory, and users feel they need to have the latest handset.
The lively exchange with the audience and among the analysts was ably moderated by Paul McLaughlin, chairman and CEO, Rudolph Technologies. — B.H.