ISS panelists: Growth for 2008, “collision course” leads to stronger industry

by James Montgomery, News Editor, Solid State Technology

Analysts participating in a midday panel discussion at ISS generally agreed that chip sales will stay in positive territory over the next year (though some are more bullish than others), after scraping out of 2007 with slim single-digit growth. One analyst cautioned that we’re on a “collision course” that could make things temporarily rocky for equipment suppliers, but will help strengthen the chip industry in the long term.

Jim Feldhan of Semico Research emerged as the optimist of the bunch, saying that after a “correction year” in 2007 where most of the pain was felt in the first half of the year, the chip industry could actually see 12% growth in 2008, and will see good market growth into 1H09. 2008 units could rise 15% vs. 9% in 2007, he added. Low inventories mean stabilizing ASPs, he said, but a continued conservative outlook will conspire to keep capacity investments low.

Also forecasting better times for chipmakers in 2008 was IC Insights president Bill McClean, who sees 9% growth this year, and a 2% tickup in ASPs (after a -6% drop in 2007, which would have been -1% without DRAMs). He echoed optimism about “incredible” chip demand, saying IC unit volumes will enjoy double-digit Y-Y growth for the seventh consecutive year (after never before seeing even >3years in a row).

McClean also pointed to an upcoming “collision course” between three market factors pushing against each other — supply (capital spending, and a trend to fab-lite and foundry models) vs. demand (unit volume growth and consumer influence) vs. ASPs (pricing pushbacks and increasing volatility). Elaborating during the Q&A session, he explained that IC manufacturers and IDMs are embracing a fab-lite model and/or increasingly sending work to foundries (e.g. TI reducing capex to ~10%/sales; ST also is talking about a similar strategy, he said). On the other side of the equation are the four big pureplay foundries to take that business: TSMC, UMC, SMIC, and Chartered, who own 80% of the foundry market and 99% of <90nm -- and they've got their own concerns about softening ASPs. (TSMC not long ago had $1500 sales/wafer, then $1200 last year, McClean pointed out, and will do what it takes to keep that from going to $1000/wafer.)

Something has to give in this tug-of-war, and the foundries are determined that it will be ASPs/wafer going up, McClean said. So, TSMC and UMC both have publicly said they will reign in spending with conservative budgets of ~20%/sales (which McClean noted essentially translates to 10% of final device sales), despite extremely high utilizations (for TSMC, >100%). With growing industry adoption of the fab-lite model requiring leading-edge foundry capacity, the foundries are betting that lower capex means lower available capacity, and will shore up their ASPs. This actually is good news in general for the industry, McClean noted, but it may “come at the expense of the equipment guys over the next couple of years.”

In terms of fab equipment spending, memory was the story in 2007 and will be again in 2008, according to Dean Freeman of Gartner Dataquest, who sees total memory spending down -16% this year, with a -30% plunge in DRAM partly offset by NAND flash (+11%). But even those DRAM belt-tightenings won’t bring the segment back to profitability, he warned, and more spending cutbacks are likely. Meanwhile, logic firms also are getting rid of a significant amount of capacity, he added. A “slow upward trend” in wafer fab capital utilization through 2009 (87%-88%-89%) means a good supply/demand balance, but he noted that it wasn’t long ago that those numbers indicated an imminent upswing in spending — not anymore!

Freeman offered three scenarios for 2008 WFE spending, all of them showing pullbacks. He sees only a 5% chance of the most optimistic bet of a -7.3% decline in equipment investments; a 55% chance of a -10.2% decline; and a 40% of the worst-case scenario, a -17.8% plunge. (All three scenarios indicate a return to growth in 2009, he added.) Specific sluggish areas in 2008 will be those heavily exposed to the DRAM sector, i.e., wet processing, oxidation/diffusion furnaces, and Al sputtering tools. Doing better will be steppers (particularly 193nm) and the overall metrology sector, which will get a push with the move to 45nm and beyond, Freeman said.

Despite characterizing the 2008 spending climate as “cloudy” due to concerns about the mortgage rate crisis and oil prices, SEMI’s Stanley Myers said fab equipment spending will decline in 2008 in the “low single digits,” but could be as much as -10% or more, following a 6%-8% decline in 2007.

During the session Q&A, panelists noted that they’re watching possibility of US recession. But McClean noted that with the global nature of the IC and electronics industry the US economically just isn’t as much a factor as used to be — only 8% of cell phone unit shipments last year were inside the US, and only 25% of electronics consumption is here (vs. 35% a decade ago, and probably sinking to 20% in the near future), he said. If worldwide GDP stays between 3.3%-3.8% (the long-term average is 3.6%), the US economy becomes a small deviation, and things like new products and capacity will have a bigger impact, he said. — J.M.


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