Nov. 11, 2008 – Word of substantial layoffs and shutdowns on the horizon spanning across the chip equipment supplier landscape points to “a steep and persistent downturn,” with demand poised to surpass the epic 2001 slump, according to an industry analyst.

Firms have been cutting headcount over the past few months, but O’Rourke says recent checks suggest much more substantial layoffs as well as “prolonged shutdowns” are imminent in the coming weeks, writes Deutsche Bank research analyst Stephen O’Rourke in a research note. “At least one company is preparing to shutdown for much of December,” he claims.

How bad is it looking? Bookings for semiconductor capital equipment are at a run-rate “worse than the worst of the post tech bubble era,” he writes. In a typical cycle, capacity purchases historically have dominated equipment investments (60%) over technology investments (37%) and process development (3%), and the upswing in 2006-2007 ushered in a long period of capacity expansion — and the heavy influence from the memory sector, where upgrades tend to update at half-nodes, translated into multiple technology upgrade cycles. But with the current overcapacity (also notably in the memory sector), O’Rourke thinks bookings will flag until the next technology upgrade cycle in late 2009 or early 2010. He notes that in early 2002 equipment bookings accelerated for two quarters as the industry emerged from that last punishing downturn, but that was pushed by an industrywide transition to copper — “lacking such a compelling technology upgrade, we envision the next upgrade cycle to be comparatively less robust,” he writes.

O’Rourke’s semiconductor capital equipment (SCE) segment includes companies such as Applied Materials, KLA-Tencor, Lam Research, Novellus, Varian Semi. Equip., Mattson, Rudolph, Asyst, Brooks, and FEI. He says to pay particular attention to Applied Materials’ quarterly update on Nov. 12, in which he expects the company to confirm “persistent, significant weakness” in chip equipment demand, with orders flat vs. projections of up 5%-10%, and next quarter (January, fiscal 1Q09) orders down -10% or more. Even AMAT’s solar biz is feeling some pain, he writes, suggesting that the company’s PV biz outlook for 2009 will be less optimistic following SunFab delays at large subcontracted customers (e.g. Best Solar) and increased caution among other SunFab customers.