Reduced capex: The new power play
07/01/2008
The semiconductor industry has matured by most measures. With one exception, it is profitable, and managers appear to have figured out how to balance supply (capacity) with demand. Unit demand remains strong, consistently rising–nearly exponentially–as the world gobbles up more and more electronics. This is a good picture.
The one exception, as Bob Johnson of Gartner Dataquest noted during the recent SEMI New England breakfast forum, is the memory market. “The memory market financials are in terrible condition and that’s being generous,” he said. “Somewhere along the line, there’s going to be a major correction in the memory markets because they have to learn how to be profitable and they’re not doing it right now.” As one example, Qimonda recently reported a negative net income of 117%. “That means for every dollar they brought in, they spent more than two. This is not a healthy financial picture at all,” said Johnson. He suggested that everyone put into his or her strategic planning a “memory meltdown???and a big one.”
Two other interesting forces at work that will undoubtedly have a big impact on the semiconductor industry are the increased acceptance of the viability of the “fab lite” or “asset lite” model, where companies shift most, if not all, of their production to foundries. What is of concern is that at the same time this is happening, many foundries have announced major reductions in capital equipment spending. TSMC, for example, is cutting capex by 30%, even though it is working at 100% utilization.
Also speaking at the SEMI breakfast, Bill McClean, president of IC Insights, said TSMC was not alone. UMC noted at the end of last year that “capex for 2008 will be significantly reduced relative to 2007,” and “from now on increasing profitability will be UMC’s number-one business objective.” Other companies that took the vow of profitability include AMD, Microchip, NEC, SMIC, ST, and TI.
One measure of profitability is revenue per wafer. McClean has looked at company sales and the number of wafer starts and calculated revenue per wafer for pure-play foundries. It has gone from an average of $1,343 per wafer in 2004 to $1,090 in 2007. “TSMC is saying $1,000 per wafer is on my agenda. I don’t like it and it’s not going to happen,” McClean said. In fact, just last month, TSMC announced a pricing increase, and other foundries soon followed.
Another sign that chipmakers are focusing on profitability is the amount of capital spending as a percentage of sales. McClean said it is now at a historic low and not at all inline with traditional patterns. In the past, when capital spending was 19% or less of sales, it was only after a year where capacity utilization was dismal. In 1986, for example, capacity utilization was only 35%, and capex spending the following year was about 18%. It’s quite a different picture this year, with capacity utilization running at 91%–with 300mm fabs even higher at 96%. Yet the industry is moving to the lowest capex spending as a percentage of sales in history–only 17.8%, predicts McClean.
What will give is pricing. “These manufacturers want better prices and they’re going to go for it by lowering their capacity and lowering their capital spending,” McClean said. How soon? He believes it will be two to three years before the effect is felt. “It’s 2010, 2011, or 2012 before we see this pricing really kick in.” This is a true power play, with the most powerful companies betting their weaker competitors will fall inline.
Equipment and materials suppliers are being asked to push R&D of 45 and 32nm process development, while also working on 450mm development, even while their revenues are being cut back due to reduced capital spending.
Where’s the good news here? I think that this kind of correction is needed. Chipmakers have been blindly racing along node to node, essentially giving away hard-won technology gains without waiting for return-on-investment. As evidenced by the memory market, the goal of profitability is sometimes lost in favor of chasing market share and bragging rights to the next-greatest technology. The world’s demand for semiconductors will continue unabated, and factories will be built to produce them. As far as the $100 laptop goes???you better get ’em while you can.
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Pete Singer
Editor-in-Chief