May 18, 2009 – Semiconductor packaging/assembly/test companies are gently ratcheting up their manufacturing capacity, but it won’t be enough to prevent a culling of the herd, with nearly 20 (mostly older) facilities likely to be shuttered within a span of two years, according to new analyses from Gartner. And an improving outlook won’t be enough to salvage what will likely be “one of the worst years in the SATS industry’s modern era.”

With no new production and none expected in the near future, IDM backend semiconductor manufacturing capacity (by area size) is expected to sink to 41% in 2009 (down from 47% in 2005) and to 40% in 2010. The other side of this coin: manufacturing capacity at semiconductor assembly and test service (SATS) firms is seen rising to 59% this year, and another tick to 60% next year (see table below).

Semiconductor manufacturers squeezed by the economic climate are more likely to outsource manufacturing to tighten up their resources, and this trend will continue as IDMs need to control expenses, writes Gartner analyst David Christensen. And the current economic quagmire will underscore this trend. “As the next upturn comes, only the very elite companies will continue to own and maintain their semiconductor manufacturing operations,” given the larger investments required to keep pace with leading-edge technologies, he says.

The upshot: Christensen anticipates 18 facilities (IDM + SATS) will have been shuttered between 4Q07 and 2Q10, most of those (14) older IDM sites. On the IDM side that represents about 5.5% of total capacity; the SATS closures barely register a tick at a 0.5% loss.

Worldwide manufacturing area (%). (Source: Gartner)

Faring better than the overall industry — but still not immune — during the weak market conditions exacerbated by global economic turmoil, SATS sales slipped -2.4% in 2008 to $20.1B, the sector’s first decline since 2001, after a >7% growth in 2007. That still outpaced the rest of the industry, though. While the top three SATS vendors (ASE, Amkor, and SPIL) all saw sales close to that of the overall sector, others fared better: Powertech (34% Y/Y growth), for example, gained “substantial share” in memory assembly/test markets, while STATS ChipPAC and Unisem also grew sales.

Gartner analysts Mark Stromberg and Jim Walker suggest 2Q09 is likely the bottom, reached sooner than expected, with “several market participants” eyeing impressive sequential growth rates (20%-30% or more), giving reason for the analysts to be optimistic about the sector’s full-year outlook. But SATS will feel the burn in 2009 just like everyone else — Gartner predicts a -20% to -25% decline in SATS revenues this year, “one of the worst years in the SATS industry’s modern era,” they write.