October 3, 2007 – Memory firms’ investments have continued longer than expected, but the ride’s about to get bumpy, with tool sales grinding to flat growth and capex backing into negative territory over the next year, according to new forecasts by Gartner Inc.

The firm now projects semiconductor capital equipment sales will rise 4.1% (to $43.67B) and total capex will inch up 1.5% (to $57.14B) in 2007, better than its predictions in July of 2.7% for equipment and 0.6% for capex. The reason: DRAM firms’ aggressive investments driven by competition and 300mm retooling plans, unexpectedly carried into 3Q07, “contrary to common sense” and despite “rampant overcapacity,” Gartner admonishes, in a new report. That softened the blow for a decline in capex from MPU manufacturers, who were mired in a price war, and foundries who haven’t seen a demand pull from leading-edge technologies (e.g., 65nm accounts for only 3% of TSMC’s revenue) and have thus shifted focus to less-expensive, more mature manufacturing. A brutal 1H07 pricing environment that killed profits for many memory firms means there’s nothing to fund more increases, Gartner notes.

But as has happened before, so shall happen again: the industry is robbing Peter to pay Paul. “The stronger 2007 is borrowing from 2008, and the second-half softening will have ramifications on growth in the coming years,” the firm says. Gartner sees a 4.4% decline in capex in 2008, instead of a previously predicted 4.8% increase, and a flat equipment market (0.3%) vs. anticipated 6.2% growth. (Look for 1Q08 to be unusually soft, Gartner notes, as it’s normally buoyed by Japanese firms closing out their fiscal year.) DRAM and logic IDM spending will be down, but flash and foundry spending is on the rise.

By tool category, wafer fab equipment (WFE) sales are seen rising 6.4% this year, getting a boost as chipmakers start to ramp 45nm manufacturing (led by Intel, which is now starting initial production at a number of sites, as well as several foundries). Investments in 90nm and 65nm tools still “dominate the picture,” though, Gartner says, as does memory equipment, which will continue to account for the lion’s share of tool sales in 2008. The WFE segment will dip -1.3% in 2008, but rebound strongly in 2009 with 11.4% growth, Gartner notes. The packaging/assembly (PAE) and automated test equipment (ATE) segments will slow way down this year — PAE from 18% in 2006 to -3.4% in 2007, ATE from ~10% in 2006 to -4.8% –but rebound to mild single-digit growth in 2008 (5.5%, 7.3%) and 2009 (3.7%, 4.1%). All chip industry segments should get back on the same spending page starting in 2009, according to Gartner, which predicts nearly 10% increases in both capex and equipment sales.

Gartner’s revised semiconductor equipment outlook
(US $B and % growth)

………………2007………………..2008………………..2009………………..2010………………..2011

Semiconductor capital equipment:
……………43.67 (4.1%)…..43.80 (0.3%)…..48.06 (9.7%)…..43.08 (-10.4%)……….48.54 (12.7%)
vs. July 11:
……………43.10 (2.7%)…..45.78 (6.2%)…..49.67 (8.5%)…..43.69 (-12.1%)……….48.95 (12.0%)
vs. jan2:
………….42.07 (-0.7%)…..50.80 (20.8%)…..44.29 (-12.8%)…..45.49 (2.7%)…….52.91 (16.3%)

Semiconductor capital spending:
………………2007……………2008……………2009……………2010………………..2011