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A July Chill, Again

By David Lammers

For the second year in a row, July kicked off on a bit of a chilly note. Last year, executives talked about a “pause” in orders, and, sure enough, July 2011 began what proved to be a poor second half for the semiconductor industry.

This year, a similar story appears to be unfolding, as the otherwise lively Semicon West in San Francisco began with Applied Materials CEO Mike Splinter explaining that “a bit of seasonality” has crept into the industry. Applied’s strong order book for semiconductor equipment, he said, had weakened due to foundry pushouts.

Since then, non-foundry companies have been acting cautiously, with Toshiba cutting NAND production by 30 percent, for example, and Texas Instruments expressing concerns about its order book.

Gartner analyst Dean Freeman said the equipment order pushouts are largely due to a couple of large foundries “overinvesting” in recent quarters. TSMC usually adds about 20,000 wafer starts of leading-edge capacity in one year. This year it is on track to add 50-55k wspm – more than two years worth of new capacity in a single year. Delays in getting TSMC’s new fabs ready are contributing to the equipment order hiccup.

Samsung also is investing, bringing its total capacity add this year up by 65,000 wspm. With Apple due to unveil the iPhone 5 in October, perhaps, and Samsung’s smartphones selling very well, Samsung needs new capacity.

The short-term view must be balanced with a big picture outlook. It was just a couple of months ago that Qualcomm and others were screaming for more 28nm capacity. (Stock analysts use the word “lumpy” to describe foundry investments.)

Bob Johnson

Gartner is predicting that semiconductor industry capex will have a compound annual growth rate (CAGR) of only 0.6 percent between 2011 and 2016. Because 2011 was a fairly strong capex year, the number appears low, but if the time period is shifted to 2010-2016 the semiconductor capex CAGR improves to only 3 percent, said Gartner analyst Bob Johnson, speaking at the SEMI/Gartner market forecast event at Semicon West.

The main problem is the world economy. Instead of the 3.6 percent global GDP growth expected for this year, the world economy will be lucky to eke out 3 percent growth, a huge difference for the chip industry. And while the very largest companies are investing heavily, the much larger number of small- and medium-sized fab owners are investing relatively little.

Splinter looks at the world economy and sees various challenges, including “weaker economies in China and Europe than we saw last year. PC shipments are quite weak, and NAND shipments also are less than what we thought. And there are certain factory operational issues at some customers.”

None of this seemed to dampen the overall mood at Semicon West. Dan Hutcheson of VLSI Research said the activity level at West was among the highest ever. Bob Hollands, the head of U.S. marketing for ASM International, also was upbeat. “Sure, the world economy is shaky now, and there are some customer delays. When demand does pick up, they expect us to be able ship equipment to them quickly – they need it in five minutes.”

Dan Tracy, the SEMI market statistics director, was positive, though he may have tempered his optimism in the weeks since Semicon West. While semiconductor capex will decline slightly this year, Tracy sees a 10 percent gain next year, to $46.7 billion. Korea will be the largest market next year, followed by North America with $10 billion in capital investments, led by Intel’s build out of Fab 42 and D1X. And don’t ignore Japan: it is still at or near the top in terms of materials, with a large number of fabs consuming wafers, chemicals, and other materials.

Christian Dieseldorff

SEMI senior analyst Christian Dieseldorff said at this time last year SEMI was pessimistic about new fab construction. But there are now 26 construction plans underway for next year. TSMC is building four fabs at the same time. Samsung has a “superfab” underway at Line 16 in Korea, as well as the S1c and S1d expansions.

“Things are looking pretty rosy for this year, and we could see 2013 hit an all time record,” Dieseldorff said.

I think the world economy is too shaky to put a “rosy” label on the industry’s prospects. We all remember 2009 after Lehman Bros. went bankrupt and the U.S. housing bubble burst. The possibility of both Europe and China solving their financial issues soon is fairly remote (not to mention Japan’s energy crisis).

One of the great things about going to sunny and cool San Francisco for Semicon West is the chance to meet what we journalists call our “good sources.” I ran into Len Jelinek, the semiconductor manufacturing analyst at IHS iSuppli, and he brought the chip industry’s prospects down to ground level. “Just ask yourself,” Jelinek said, “when was the last time you bought a new laptop, or a new TV?” His point is that people are learning to make do with what they have.

His question brings to mind a quote attributed to the Greek philosopher Epicurus: “Nothing is enough for the man to whom enough is too little.”

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