1998 capital spending trends: Boom to bust
10/01/1998
1998 capital spending trends: Boom to bust
Bill McClean, IC Insights Inc., Scottsdale, Arizona
Two of the driving forces in the IC industry today are capacity and production (output). The 1990s have thus far experienced both extremes of the capacity spectrum. While the 1993-1995 timeframe witnessed a paucity of IC capacity worldwide, the industry made a 180? turn beginning in 1996. The overcapacity situation that began in January 1996 continues to be a drag on IC industry dollar-volume growth in 1998.
The culprit for the IC unit and dollar-volume growth disparity over the past two years has been the steep slide in IC average selling price (ASP) brought on by excess wafer fabrication capacity and production. For 1997, IC ASPs declined 15%. This decline followed a 10% drop in IC ASPs witnessed in 1996. For 1998, IC Insights forecasts an additional 12% decline for IC ASP.
As in any business, the overcapacity environment in the IC industry can trace its roots back to the simple balance, or imbalance, of supply and demand. Considering the 22% IC unit-volume surge and 98% DRAM bit-volume usage increase in 1997, the current excesses have not been caused by faltering demand. The focus must be directed toward the supply side of the equation.
Worldwide capital spending
As shown in the table (see p. 56), worldwide capital expenditures declined 12% in 1997. This decline followed a year of record capital expenditures in 1996. Worldwide capital spending has been heavily influenced by Intel, which spent $4.5 billion in 1997. Excluding Intel, worldwide capital expenditures in 1997 would have declined 17%. Capital expenditures in 1998 are forecast to decline another 23%. It is interesting to note that Intel`s 1998 capital spending is forecast to be only about 10% less than all of the European and Korean companies` spending combined.
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As the table shows, all regions are expected to decrease their capital expenditures in 1998, with the largest decrease occurring for the Korean companies (-61%). In fact, the Taiwanese IC producers are now expected to cut their capital spending more than even the Japanese companies.
Figure 1 (see p. 59) shows the composition of 1996 capital spending by nationality. North American semiconductor companies represented the highest percentage of total worldwide spending, followed by the Japanese. Korean producers ranked third in spending.
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Figure 1. 1996 semiconductor capital spending ($43.1 billion).
Figure 2 presents the forecast for capital spending in 1998. With drastic semiconductor spending cutbacks expected from the Korean producers, Taiwanese companies are forecast to represent the third largest spending group in 1998. The Taiwanese spending will be led by the two large foundry operations, TSMC and UMC, which are expected to represent about 52% of Taiwanese spending in 1998.
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Figure 2. 1998 semiconductor capital spending forecast ($29.1 billion).
In order for semiconductor producers to keep up with industry demand, capital spending as a percent of total IC sales must average about 21-22%. Japanese companies` spending as a percent of total IC sales for 1997 was at the "optimum" level. North American companies were more conservative that year, with spending levels at only 19%. On the other hand, Taiwanese and Korean companies spent well beyond the optimal level in both 1996 and 1997. In fact, Taiwanese companies spent 117% of their total IC sales in 1997 on capital expenditures.
North American companies. As the table shows, capital spending by North American companies in 1997 declined 5% over 1996, and is expected to decline another 2% in 1998. Intel`s spending significantly influenced the growth rate for 1997. Without Intel, capital spending by North American companies would have declined 20%. The spending forecast for 1998 is mostly due to equipment purchases as companies upgrade their facilities to advanced processes.
Intel`s spending in 1997 was over three times as much as the next top North American spender, IBM. Intel is forecast to keep its capital expenditures flat in 1998 at $4.5 billion, which would represent 34% of forecast 1998 North American company expenditures. Much of Intel`s spending will be targeted at moving its microprocessor manufacturing processes down to 0.25- and 0.18-?m technologies.
Japanese companies. In US dollars, Japanese capital spending declined 16% in 1997. The decline in spending is actually overstated when converted to US dollars - in terms of yen, spending decreased only 6%. Japanese spending in 1998 is forecast to be slashed by at least 32% when measured in US dollars using an exchange rate of 138 yen/$1.00 (the exchange rate was 147 yen/$1.00 in mid-August).
Spending by Japanese IC companies has been focused on 0.25-?m ASIC process technology and production of 64-Mbit DRAMs. Another area of investment for Japan`s top IC companies is 300-mm wafer development. In fact, all top 10 Japanese companies are members of J300, the Japan-based consortium for the development of 300-mm wafer technology.
European companies. European capital spending in 1997 declined 10% in 1997. Despite a forecast decline of 12% in 1998, spending by European companies will remain relatively high, at 27%, as a percent of IC sales.
Siemens is aggressively moving toward 0.25-?m technology, and its increased spending in 1997 was reflective of that. However, IC Insights forecasts that Siemens will cut back spending at least 25% in 1998 as it scales back its DRAM expansion plans.
STMicroelectronics` spending in 1997 decreased 8%; however, its spending as a percent of IC sales has consistently been over 30% for the past few years. STMicroelectronics has been carrying out 1996 plans to open one new fab facility every year through 2000. Its Catania, Italy, facility came online in early 1997, and its Rousset, France, facility came online during 1998.
ROW companies. Capital expenditures by South Korean companies in 1997 decreased 32% as compared to 1996. What is interesting about the Korean IC companies` capital spending is that even though most companies experienced double-digit declines in their sales, their spending as a percent of IC sales remained high, 49% in 1997.
Interestingly, the parent companies of the three largest Korean IC producers have announced massive cutbacks for capital expenditures - including spending budgets for their semiconductor businesses. In total, semiconductor-related expenditures for Korea`s top IC companies are expected to decrease 61% in 1998. The Korean company capital spending as a percent of sales figure for 1998 is forecast to slump to a more realistic 24%.
Overall, 1997 capital spending by Taiwanese IC companies stayed flat at 1996 spending levels. This flat spending level came after several years of aggressive increases in spending. Spending as a percent of IC sales was still an astronomical 117% in 1997. Even as their share of total worldwide IC sales was declining, Taiwanese companies kept their spending levels extremely high.
One of the most frequently asked questions over the past two years was, "Can the Taiwanese companies really follow through with their capital spending plans through this downturn?" The answer is now very clear - no. Many Taiwanese companies are not increasing capital spending this year, and are deeply slashing previously announced budgets. For 1998, Taiwanese company spending cuts are forecast to be at least 33%; however, as a percent of IC sales, spending will still be a very high 83%.
Spending as a percent of sales
Capital expenditures as a percent of total IC sales should average about 21-22% in order for IC producers to keep up with industry demand. The lackluster IC industry from 1989 through 1993 (when growth rates were 10% or less each year), caused many producers to slash capital spending budgets. The frugal spending on capacity expansion during this period is what led to the capacity shortfall that began to show itself in 1994. It should be remembered that because of the 18-24 month startup and construction time needed for IC facilities to fully come online, the effects of over- or under-spending typically take some time to unfold.
As the IC industry began to gain momentum in 1994 and into 1995, IC producers attempted to make up for the spending cuts of 1989-1993. By 1996, semiconductor capital spending as a percent of IC sales reached an all-time high of 32%. For 1998, the percent-spending figure is forecast to recede to about 23%, about equal to the estimated percentage level needed to keep up with industry demand.
The IC industry is rarely at a "normal" spending ratio for very long - IC companies are always overreacting with their spending budgets one way or the other. The inherent lag time in getting a new IC facility built and productive, coupled with the usual industrywide over- or under-spending has created the history of volatility in IC capacity. This in turn has led to the sometimes wildly fluctuating IC ASPs, which have helped create the famous boom/bust periods in the IC market. Considering the significant cutbacks by the IC producers in 1997 and 1998, it appears that the IC industry "cycle" is still intact.
Bill McClean is the president of IC Insights Inc., a semiconductor market research firm. IC Insights Inc., 13901 North 73rd St., Suite 205, Scottsdale, AZ 85260; ph 602/348-1133, fax 602/348-9745, www.icinsights.com.