April 20, 2007 – Acknowledging “considerable downside risk” in the semiconductor market due to memory oversupplies and pricing declines, Gartner Dataquest has lowered its forecast for chip tool sales for the next two years.
The firm now projects a -1.5% decline in overall semiconductor capital spending in 2007 to $55.23 billion, instead of a 1% increase to $56.62 billion. 2008 also will see lower growth, just 10.7% to $61.15 billion instead of 16.1% growth to $65.73 billion as previously forecasted. Gartner has muted its outlook, though, for 2009 (-6.1% instead of -8.3%) and 2010 (-2.2% instead of -2.6%).
“2007 may still be a decent year for semiconductor equipment manufacturers aligned with memory, but those that serve the rest of the market will face a weaker market than last year,” Klaus Rinnen, managing vice president for Gartner’s semiconductor manufacturing and design research group, said in a statement.
Memory spending could reach an eye-popping 52% of total capital spending, and overspending will continue to cast a shadow on 2008, as supplies build beyond the certainty of strength among several demand factors. The firm says it’s found some companies are already pulling in equipment orders a quarter ahead of schedule, and weakness in memory has led to WFE pushouts among second-tier firms, which if it spreads to top-tier memory suppliers would weaken 2007 spending even further.
Capex is expected to be more backend-loaded as business momentum improves starting in 2Q. Slow growth continues among SATS companies, with 5%-15% sequential sales declines in 1Q among SATS leaders, but sales rebounds in March from ASE and SPIL suggest 1Q was the trough. For the PAE sector, “there are some indications that orders are bottoming, but visibility remains poor,” Gartner wrote, adding that after revenue declines in recent quarters “positive PAE growth for 2007 is all but impossible.” The ATE sector has similarly weakened, seen slow for most of the rest of this year.
Last month Gartner also cut its estimates for semiconductor sales for both 2007 and 2008, citing a “sluggish start” including soft end markets and an inventory surplus.
Capacity, production outlook murky
Worldwide semiconductor wafer fab utilization rates declined for the third straight quarter in 1Q07 (to 85.1%), as production volume stalled in the face of continuing increases in capacity, but should climb gradually through the rest of the year, peaking at 91% a year from now. Leading-edge utilization rates (90nm and below) are still barely above 90%, but should return to 95% later this year, Gartner predicts.
Foundry sales dropped 12.5% in 1Q07 due to a combination of slumping prices and 3% fewer wafer shipments, and capacity at leading-edge nodes took the biggest hit with most 300mm facilities running in the low 60% range, Gartner noted.
The firm noted that some product areas of chip inventories have been worked down, but sharp price declines in both NAND and DRAM as well as surging memory capacity expansions are taking their toll, and utilization rates continue to decrease through the present quarter — and with many companies planning to double bit capacity in 2007, “little reprieve is in sight,” Gartner noted. The firm sees particular softness in 2Q-3Q as the industry absorbs capacity additions, adding that memory overcapacity could extend into 4Q “and beyond,” keeping downward pressure on ASPs and revenues, which will stunt equipment sales in 4Q as well.
Pricing’s the key
ASPs remain the key metric for memory, Gartner pointed out, as second-tier firms will start bleeding cash as ASPs approach costs — and a below-cost drop in 512Mb DRAM memory ASPs (~$2) before year’s end “would likely result in swift spending cuts,” equipment order pushouts, and slow order releases. DRAM suppliers could be sufficiently pained by 4Q07 or maybe 1Q08 to finally start cutting capex, leading to around 10% reductions in 2008 investments, Gartner noted.
NAND flash, on the other hand, has rebounded after an awful 1Q07 (pricing off by 35%), and a less-aggressive pricing outlook means 2007 could be positive in terms of NAND revenues, particularly if flash-based portable media players surface before year’s end, Gartner suggested. Projected demand for handsets and video functionality, along with some carefully-managed capacity expansion in 2007, could drive 30% growth in 2008 and accelerating capex.
Vista, GDP questions still loom
Specific key markets for electronics sales, e.g. PCs and digital cellular handsets, remain solid and will continue to underpin semiconductor demand, Gartner suggests (e.g. cell phone sales rising 10.5% in 2007), though sales of higher-end 3G products and reduced foundry utilization weaken outlook for ASSPs both this year and next. Consumer electronics, including portable media players, game consoles, and flat-panel TVs, is still strong, with digital TV demand improving as prices continue to fall.
Vista had been trumpeted as a significant contributor to semiconductor demand, but unit sales have been “lackluster,” with overall PC slaes still hovering around 10% through 2009. Enterprise sales of Vista aren’t likely to improve much until the first service pack arrives later this year.
Gartner sees 2008 shaping up much like this year, with “historically strong memory spending” as suppliers continue to jostle for market share, though with some DRAM output reigned in. But the firm is even more unsure about consumer spending habits and reliable growth drivers, e.g. US presidential election and a mandated switch toward digital TV, plus the Beijing Olympic games. Worldwide GDP growth actually looks better than expected this year (3.4% instead of 3.2%, according to stats from Global Insight), but the IMF sees slower US GDP growth (2.2% instead of 2.9% — Global Insight projects an even lower 2.1%), with a sustained housing slump and high energy prices, and the subprime mortgage debacle causing waves. Improved European labor markets could offset questionable consumer spending strength in the US and Japan, Gartner suggests, but confidence that consumers will once again prop up the semiconductor industry “is waning as time ticks on.” — J.M.
By the numbers: Gartner’s revised semiconductor equipment outlook
(US $B and % growth)
………………2007……..2008……..2009……..2010……..2011
Semiconductor capital spending
OLD:…..$56.62B…..65.73…..60.28…..58.70…..68.32
…………….1.0%……….16.1……..-8.3…….-2.6…….16.4
NEW:
……………55.23…..61.15…..57.42…..56.18…..64.86
…………….-1.5……..10.7…….-6.1…….-2.2…….15.4
[2005-2011 CAGR: 5.4%]
WFE
OLD:…..33.00…..39.09…..34.66…..34.94…..41.37
……………..0.6…….18.4……..-11.3…….0.8…….18.4
NEW:
……………32.39…..36.78…..33.24…..33.41…..38.94
…………….-0.7…….13.6…….-9.6……..0.5……..16.6
[2005-2011 CAGR: 7.0%]
PAE
OLD:…….4.56…….5.74…….4.83…….5.10…….5.79
……………..-5.7…….25.8…….-15.7…….5.6…….13.5
NEW:
……………..4.58…….5.51…….4.68…….5.04…….5.53
…………….-12.2…….20.2…….-15.0…….7.7………9.7
[2005-2011 CAGR: 3.8%]
ATE
OLD:…….4.51…….5.98…….4.79…….5.45…….5.75
……………..-5.0…….32.6…….-19.8…….13.7…….5.6
NEW:
…………….3.66…….4.38…….3.93…….4.39…….4.94
……………-11.2…….19.8…….-10.3…….11.7…….12.4
[2005-2011 CAGR: 4.6%]
Source: Gartner Dataquest