Fab Capacity: When, Where, How Much, Too Much?

Whether the 2004 semiconductor market comes in with 29 or 39% growth this year, one thing is for certain — lots of 300 mm silicon is coming online. Unfortunately, this massive fab ramp-up is happening concurrent with a slowdown of many of the key electronic markets, specifically cellphones and PCs. But, unlike the previous downturn, the rapidly rising ASPs of chips to fuel company profits hasn't quite occurred, and the upturn, which has arguably been in force for two years now, has yet to result in an increased job force. So, this upturn is a far cry from the upturn of 2000. Which begs one to ask, "Will this downturn also be unlike the crash of 2001 and 2002?" Analysts addressed the question: "Fab capacity: When, where, how much, too much?" at Semiconductor International's annual breakfast forum in July. They determined that the downturn is coming, perhaps very soon, but this economy is different and companies are responding very differently to the warning signs.

Jim Feldhan, president of Semico Research (Phoenix), said his company focuses first on the end markets of electronics (Table 1 ). "The end markets will slow down next year, but they won't go flat like they did in 2000." Semico believes yields will be better on 130 and 90 nm products next year, and a lot of 200 mm facilities are coming on in China, which will add a substantial amount of supply. "I think the fabs in China will price their products to gain market share, not necessarily to make a profit, and that's going to hurt the pricing structure of the industry." All this will occur as 11 new 300 mm sites ramp in 2005, adding capacity to the 15 existing 300 mm sites in production. Semico sees a bright spot in the foundry market, which it expects to grow by a 26% CAGR from 2003 to 2008.

Unfortunately, Feldhan said the industry has already passed a turning point, according to the company's inflection point indicator (IPI), a metric that typically peaks 8-9 months prior to a significant drop in semiconductor sales. The latest IPI indicates a slowdown in Q1 2005. He warned, "Historically, any year that the industry grew 35% or more, without exception, the following year was a downturn."

George Burns of Strategic Marketing Associates (San Francisco) began his forecast by pointing out that the fabs under construction or being equipped are in Japan and Taiwan, while most of the existing capacity is in Taiwan and the United States (Fig. 1 ). "Regionally, Japan has more fabs under construction than any other part of the world," he said. "And if we look at capacity by year, in 2003, 500,000 200 mm wafers additional capacity was brought online, and the end of 2004 will have brought twice as much online. Those are 5% and 10% increases. Eventually, it's going to be too much capacity, but not until the end of 2005." Burns expects capital spending to increase by 30% in 2005, following an amazing 55% increase this year. More than half of the spending is expected to go toward DRAM and foundry capacity. "Are we going to have too much capacity? We always do. But right now we're in a big fab boom, almost as big as in the year 2000; I think it's going to last for more than a year," he said.

The 300 mm capacity being equipped or under construction equals 520,000 wafers/month, which is being added to the existing capacity of 690,000 wafers/month. (Source: Strategic Marketing Associates)

Despite the positive investment forecast for Japan, the Japanese spokesperson was conservative in his comments about the future. "People are hesitating to invest too heavily in Japan," said Kenji Tsuda, editorial director of Semiconductor International Japan (Tokyo). "They are very focused on the consumer electronic business, and the capital investment level is at approximately the same level as it was in 2003." He said there has been a change in the Japanese businesses, with a shift in priorities from revenues to profits. In addition, he said that companies in the semiconductor business are now more dedicated to the chip business, whereas before the board of directors, for instance, might be comprised of individuals from many different industries.

Semico's Feldhan commented that the historical underinvestment in Japan for IC manufacturing is changing as the industry moves to 90 nm and beyond. "I think the Japanese have a renewed investment policy to make sure they don't have to rely on an external source such as the foundry market." Tsuda added that there are two core areas that Japanese companies are specializing in: system-on-a-chip, mostly single-wafer processing because of the small volumes, and flash memory devices.

William Zhang, publisher and editorial director of Semiconductor International China (Hong Kong), stated that China accounted for 9% of the semiconductor output in 2003, and he expects that level to be 15% by the end of 2004. The forecast for 2010 is quite ambitious — projecting $54B semiconductor consumption, $23B semiconductor manufacturing output, $3B in semiconductor equipment sales and electronics accounting for 10% of the country's GDP. As it stands today, China has four of the top 15 pure-play foundries in the world (Table 2 ). According to Zhang, ASMC is becoming an IDM. CSMC-HJ is a renovation of a state-owned business. "HHNEC expects to be in operation by next year. STMicro and Hynix want to build a fab in Wuxi, near Shanghai. Grace has a fab that is designed for 300 mm but is running 200 mm, and will switch over as soon as they can," he said, adding, "There is always concern about overcapacity; many refurbished 6 in. and 8 in. lines are moving to China."

Zhang spoke of restrictions on leading-edge equipment on front-end processing tools, but loosening of such restrictions in the packaging area. China is the fourth largest semiconductor packaging market in the world. He spoke of a 6.5× increase in the materials market by 2010. Equipment demand in China in 2003 was $953B for front end and $203B for back end. Zhang talked about growth in foundry, packaging, IDM, even local IC design capability. He admits that skilled labor is an issue in this country of 1.3 billion. In addition, "Overcapacity is always an issue, because the local players don't have the expertise and they tend to copy each other in how they do business."

Jim Haughey, director of economics at Reed Business Information (Semiconductor International's parent company), gave a general economic forecast including semiconductors and electronics, but also the worldwide economy. He compared the 1991-92 recovery to the current one (Table 3 ), showing all favorable metrics. "Japan's economic revival was initiated by exports to the U.S. and China, but it is now self-sustaining," he said. His overall economic outlook was positive and, with several assumptions, he sees continued growth. These include a relatively stable condition in Iraq, some slowing of the economic boom in China, continued strengthening of the Japanese recovery and an ongoing rise in U.S. labor productivity. Regarding China, he said the country is willing to accept rising inflation to gain jobs for as many as 100 million unemployed, so this is a fragile situation where cost advantages are eroding, social needs have been postponed and financial reforms are unavoidable.

In the United States, "consumers are exhausted, and the housing boom is over," he said. "If investors get nervous — the people who buy bricks and mortar and steel — then there is reason for concern, but I don't expect that to happen for another year." To a certain extent, his 2004-05 forecast depends on how aggressively businesses invest. "We are about at the peak growth rate for electronics now — it will keep growing, but this is the mature end of the business cycle."

Haughey has an optimistic forecast of 18% growth for 2005 for the semiconductor market, but he warned, "This market is not going to bring the equipment market back to where it was in the last expansion." He expects equipment sales to peak in early 2006 at ~10-15% below the 2000 peak level. Interestingly, Haughey pointed out that equipment investment as a portion of device sales revenue is barely half the share that it was in mid-2000 when device sales were at the same level as they are today.

To see all the slides presented at this year's State of the Industry Breakfast, go to www.reed- electronics.com/semiconductor/contents/pdf/SIBreakfast2004.pdf .