December 7, 2008 – Chip manufacturers are getting serious about buckling down on their capital spending, as profits have just about reached their “pain threshold,” and the resulting belt-tightening will “shake the foundation of the IC industry,” according to analyst firm IC Insights.

The firm expects 2007 capex to increase about 3%, right where chipmakers set their overall budgets at the start of the year, though with some individual exceptions. Samsung, for example, is spending 22% more this year ($8.33), roughly 41% of its sales, nearly twice the industry average, the firm points out. Meanwhile, Intel lowered capex by 15% this year. Together the two companies accounted for 24% of total industry capex.

IC Insights thinks chipmakers’ spending will fall off by around 9% to around $51.0B. Depending on what Samsung and Intel plan to do (neither has released 2008 capital spending guidance), total industry capex could swing from a best-case scenario of -5%, to a worst-case -13%. Cutting back the most are the DRAM suppliers (Micron, ProMOS, Samsung, Hynix, and Nanya), who seem to have finally made the connection between their heavy capacity expansion in 2006 (+44% spending) and collapsing ASPs in 2007.

In general, semiconductor manufacturers are seen becoming ever smarter about their investments, and their capital spending as a percent of sales should slip from 22% in 2007 to 18% in 2008 — the lowest since 2003, the year before a boom in IC sales and a 10% ASP spike. IC Insights notes that this spending behavior is likely to stay in the “high-teens” through the latter half of the decade.

The firm drew a comparison to the automotive industry, where companies like Ford are cutting back in business areas as they reach a “pain threshold” of pricing pressures and low margins. “Marketshare gains are willing to [be] sacrificed in order to achieve higher profits,” the firm writes, pointing to foundry UMC’s statement in its 3Q07 financial results that “increasing profitability will be UMC’s number one business objective,” starting with “the implementation of a disciplined capex strategy.”