Fab Capacity on the Rise

Will there be enough fab capacity in the next two years? Will it be ready when it is needed? Will chip buyers be hit with soaring prices and leads as they were in 2000? Or will there be too much capacity, plunging fab operators and their suppliers into prolonged losses as in 2001-02? While there are still some equipment and process investment as well as staffing options available to change capacity, most of the dice have already been cast for 2004-05 because equipment order leadtimes have stretched so long. Inherently, the semiconductor business is very cyclical. But will the market reach the extreme high and low levels of the last cycle? There is increasing evidence that semiconductor demand from a booming worldwide economy is being underestimated. If so, supply capacity may be inadequate.

World Semiconductor Trade Statistics (WSTS), Gartner and other market analysts recently bumped their 2004 semiconductor shipments forecasts to a 25-30% growth, declining to 8-15% rise in 2005. This requires either more excess capacity by year-end to bring average selling prices down or a peak in the pace of sales growth this summer. Both are becoming increasingly implausible unless fab operators are able to significantly speed up yield improvements, the ramp up of new lines or die shrinks.

World economic growth is stronger than was anticipated earlier this year and much stronger than expected late last year. Consensus economic growth forecasts are now higher for almost every country. Hence, potential semiconductor demand is higher than when current capacity plans were made. In the United States, the GDP growth outlook is up 0.5% for both this year and next year. Alone, this will add 3-4% to the level of chip demand late next year. The economic growth outlook has been raised even more in Japan and China, in spite of government actions to slow demand growth.

Japan surprised everyone by engineering sustained growth in domestic spending after more than a decade of stagnation. Japanese manufacturing appears to be about four months behind the United States in the business cycle, so the period of fastest growth is still ahead.

Economic recovery lags even further in Europe, Canada and Latin America, together one-third of the world economy. Peak economic growth in these regions is likely year-end or later. Overall, that puts the period of fastest world economic growth — and fastest semiconductor demand growth — about six months ahead. The result this year is about a 30% sales gain with a prediction of 20% more next year, making chip demand at the end of next year as much as 15% higher than the WSTS forecast. That may overwhelm the fab capacity now planned, or enable it to be hurried into operation.