by Bob Haavind, Editorial Director

The industry is a-changin’, but there’s both good and bad news as a result, suggested a panel of top Wall Street analysts (with an occasional bit of prodding) at the recent Industry Strategy Symposium (ISS) at Half Moon Bay, CA.

Lots of discussion focused on an apparent uptick in the trend line for semiconductors starting about 2003. Is this an anomaly, suggesting an impending major downturn triggered by overcapacity, or has the industry moved back to a higher growth mode once again? There was agreement that fast-rising consumer markets, especially in Asia, were indeed putting growth back on a somewhat faster track.

But Brett Hodess of Merrill Lynch added a note of caution. He believes that growth will be above 10% going forward, but not 16%. While there has been five years of double-digit capex spending growth for memory fabs, we don’t see overcapacity now, he pointed out. Capacity remains right at the edge, so we could see some shortages or some excess capacity over the next few quarters. It is not at all like 1996 or 2001, he said, when plunging ASPs forced fabs to dramatically cut capital spending. The Asian memory companies do not see ASPs falling so badly, and meanwhile, 200mm DRAM capacity is still very efficient. While Hodess agrees that foundry capex growth has slowed, he believes it may rise 10% later in 2007. In spite of a current slowdown, he expects that excess inventory will absorbed soon.

Satya Kumar of Credit Suisse concurred that the uptick in growth since 2003 is genuine, with new and developing markets moving much faster than did US markets 30 years ago. Japan still has a big influence, with over half its chip revenues in consumer. In Korea, DRAM has been steadily rising, now reaching over 50% (see chart above), and he expects that the same may happen in Taiwan over the next ten years. Kumar sees the slowing in NAND flash right now being counterbalanced by strength in DRAM, but that these markets may flip later this year. Margins in Taiwan are higher than in Korea and are rising even at some of the smaller companies there, he said, so he feels that some of the smaller players in Taiwan may help to prop up capex later this year. He predicts capex going up 6% in both 2007 and 2008 with memory as an incremental driver (see chart below).

Despite a current slowdown in chips, Stephan O’Rourke of Deutsche Bank does not expect any major slump because of burgeoning consumer markets. He believes that global long-term growth will be dominated by markets in Asia and the US, and while Western Europe may lag there still will be opportunities for companies there to do very well. If the growth trend line continues to tick up, and downturns are shorter and shallower, the investment perspective will change, O’Rourke believes, increasing valuations for equipment and materials firms.

Mark FitzGerald of Bank of America discounted charts showing unit chip growth, suggesting that it is more important to look at wafers. “Fifty-cent analog parts do not make up for $100 microprocessors,” he explained. Instead, it is necessary to look at capital intensity to see where the industry stands in the current cycle. While memory may be seeing 120% bit growth, all semiconductors are flat to down