After the rude shock of 1996 equipment sales seen flat 97

01/01/1997

After the rude shock of 1996, equipment sales seen flat in `97

Peter N. Dunn, Senior Editor

If 1994 and 1995 were party years for both chipmakers and their tool suppliers, 1996 brought a hangover. Memory chips took three years of price drops all at once, causing the overall semiconductor market to shrink for the first time in over a decade, and the arrival of new fabs, coupled with slackening demand early in the year, created excess capacity. As a result, capital equipment orders were cut or postponed, and many tool suppliers engaged in substantial work force reductions.

By late autumn, chip sales were showing signs of improving health, and the consensus among market watchers is that 1997 will see a return to growth - possibly back to the 1995 levels - with the rest of the decade promising steady increases in market size (Fig. 1). (Of course, a year ago many of these forecasters were predicting that 1996 would be a growth year - see "What went wrong? DRAM prices, mostly.")

Figure 1. Estimated semiconductor market, 1994-1999, according to the World Semiconductor Trade Statistics organization, which collects figures from 70 major chipmakers around the world.

For equipment vendors, however, things are not so rosy - at least in the near term. Although 1996 sales levels will shatter all previous marks, they were achieved mostly on the strength of a backlog in place at the start of the year. By November, monthly sales for North American toolmakers were running at less than half their peak at the boom`s height, and reports were emerging of capital spending cuts at Japanese and South Korean companies. While there is some debate among analysts as to just how long the soft market will last, it appears all but certain that 1997 will see a decline in tool purchases from the record levels of 1996. Looking out toward the end of the decade, strong growth is seen as 0.25-micron production and the 256-Mbit DRAM generation begin to ramp up in earnest; the real question is whether this will hit in 1998 or 1999.

Here is a rundown on how three major analysis firms (in alphabetical order) see the new year shaping up for capital equipment suppliers:

Advanced Forecasting. Moshe Handelsman, a quantitative analyst and president of Advanced Forecasting, Cupertino, CA, can boast that his firm was predicting a mid-1996 downturn in equipment sales in mid-1995, and certainly his forecast of 20 percent growth in 1996 will be closer to the mark than some rivals. Unfortunately, says Handelsman, equipment vendors continued to ramp capacity in response to a huge accumulation of backlog, which was generated by double- and triple-ordering of equipment by chipmakers, as well as a buildup of chip inventory. "These disappeared, together with the inflated DRAM prices, as soon as capacity satisfied the true demand."

Figure 2. One view of fab equipment quarterly shipments, from market researcher Dataquest. After the surge in early 1996, shipments are seen dropping until late 1997, and then gradually rising in 1998.

For 1997, Handelsman sees sales remaining flat relative to the last three years. "The underlying demand for semiconductors will not collapse in 1997. However, the overshooting of the equipment industry at the end of 1995 and beginning of 1996 brought overall capacity to a higher level than justified by demand. This will cause a `correction` in equipment shipments, bringing them to a plateau in 1997." Handelsman`s forecast does show an uptick in monthly shipments in the second quarter, followed by a dropoff to the end of the year, but he says this is primarily due to seasonal factors. "I expect in 1998 it will start moving back up," he added.

Dataquest. Principal analyst Clark Fuhs of Dataquest, San Jose, CA, suggested at the Advanced Semiconductor Manufacturing Conference in Boston that DRAM-related capital investment would be cut by as much as one-quarter in 1997, equal to a 30 percent cut in DRAM equipment spending, with tool buys in Asia and Japan hit the hardest. He also predicted that advanced logic spending would recover first, and that Japanese firms would continue to build fab shells to be prepared for the next business cycle.

Fuhs said quarter-to-quarter equipment sales rates would continue to drop until 4Q97, and gradually ramp up through 1998 (Fig. 2). Sales levels of the current year (estimated at $22.3 billion, up 17.1 percent over 1995) are expected to slip about 16 percent to $18.8 billion in 1997, and grow just 6.1 percent in 1998. They will not match the past year`s levels until 1999, when they are expected to reach $25.4 billion.

New logic fabs will lead the way out of the recession in the latter part of 1997 and into 1998, said Fuhs, with a trickle of DRAM fabs being added. Significant DRAM spending will not resume until 1999, though when it does, it should bring a very strong market for advanced tooling - the forecast for 2000 shows a whopping 42.7 percent growth. (It should be noted that this is still well below the phenomenal 76.6 percent increase logged in 1995!)

VLSI Research. Senior economist John Chen of VLSI Research notes that worldwide equipment sales turned down in the second quarter of 1996, one quarter after the chip market did, and said they will probably not turn up again until the fourth quarter of 1997. Slippage in sales rates is seen in each quarter until then, with 3Q97 billings dropping to $7.07 billion, the lowest level since 2Q95. Bookings, however, will start to pick up a little sooner, outstripping shipments in 3Q97 to produce a positive book-to-bill ratio.

Chen said 1997 will probably see equipment sales drop by 13.8 percent, with 1998 bringing a 17.2 percent increase. He noted that equipment sales grew by about 15 percent in 1996, "mostly because of the backlog. Chip companies didn`t cancel many orders - they carried them over. But then, as chip sales profits shrank, they were not able to place new orders. That will affect 1997 revenues. But the drivers for long-term growth are still there." Indeed, VLSIR`s figures show 33.1 percent growth in 1999, and 41.2 percent in 2000.

One interesting note: VLSIR sees equipment costs accounting for a larger percentage of semiconductor sales. The level has risen from 12.3 percent in 1980 to 16.3 in 1990, and 20.1 in 1995. After a spike to 25.9 percent in 1996, it is seen ranging between 19 and 21 percent through 2001.