Semiconductor Market Steady as She Goes?

The consumer has been confident for a while. Now it's the corporations' turn to start helping boost the economy even further, including, of course, the semiconductor and electronics industries. This was one key message from Semiconductor International's 23rd State-of-the-Industry breakfast, held at SEMICON West. The statement, "The consumer is exhausted," was spoken throughout the show, and investment in information technology (IT) by the world's corporations is needed at this point to drive the semiconductor industry to greater heights. "GDP growth drives business confidence," said Dan Niles, president and CEO of Neuberger Berman, a San Francisco-based division of Lehman Brothers. He expects IT demand to improve, pointing out that the inventory correction of 2004 has ended, making room for increased capital spending "because uncertainty has a way of getting behind you."

Dean Freeman, research director at Gartner Dataquest, emphasized the immediate challenge: "Can markets and corporations look beyond highly publicized short-term risks to see the hidden opportunities in a stable economy?" He said, "The consumer is driving GDP, while the corporate world is sitting on its cash." With inventories under control, which incidentally spiked when oil prices spiked, Freeman characterized the industry as being "in the happy/indecision phase of capacity utilization." People are happy with the level of utilization, but indecisive as to how much spending is necessary to keep the industry at its happy level.

Utilization is not consistent across the industry either (Fig. 1). Capacity utilization is naturally highest at the smallest device feature sizes (~93% at <0.16 µm in 1Q05). Foundry utilization tends to be lower than the industry average of ~86%, ranging between ~60% at Chartered Semiconductor and 78% at TSMC, according to Jim Feldhan, president and founder of Semico Research Corp. (Phoenix).

1. Despite the decline in capacity utilization at the end of 2004, utilization is expected to increase in the coming quarters. (Source: Semico Research Corp.)

George Burns, founder of Strategic Marketing Technologies, was the most optimistic among the analysts, predicting new capacity growth led by DRAM, foundry, non-volatile memory and logic devices (Fig. 2). He gave the status of 300 mm fabs, stating that 16% are currently online, 12% are being constructed or equipped, and another 8% are planned. He noted that new capacity as a percentage of existing capacity in 2005 is ~8%, which he expects to rise to 9% in 2006. This is lower than in 1997 and 2001, when it was 12% and 10%, respectively. Burns expects 300 mm capacity to soon account for 25% of silicon produced.

2. Though foundries led installation of new fab capacity in 2000-2004, DRAM is expected to lead spending in coming years. (Source: Strategic Marketing Associates)

Feldhan showed his company's Inflection Point Indicator (IPI), which, following an eight-month run-up in semiconductor sales from March to November 2004, the IPI spiked downward in December 2004, then up in January 2005, and now is up again in May 2005, indicating a 3Q recovery this year. Feldhan said to look for a mix of traditional markets, such as PCs, servers and mobile phones, with new markets such as the digital home and digital consumer. He forecasted that traditional markets will drive 58% of the wafer consumption in 2009, with emerging applications coming in strong at 40%. These are in areas of personal digital content, fuel cells, security, broadband wireless, automotive and home entertainment. Niles highlighted strong pockets of demand in consumer applications (MP3, DTV, set-top boxes and DVD-R), adding that wireless portability and broadband adoption should help sustain computing demand.

3. The industry is maturing, as evidenced by a seemingly moderate compound annual growth rate, which started 10 years ago. (Source: SIA and Lehman Brothers estimates)

The semiconductor industry, which once grew at a compounded rate in excess of 15%, is now getting used to its more mature 7% CAGR, a trend that started as early as 1995 (Fig. 3). With the consumer as its customer, pricing pressure on chips and wafer processing equipment and materials is sure to continue. Even so, there are fast growing equipment markets led by 193 nm scanners, thin-film metrology tools, direct-write lithography for masks, SEMs and spray processors (Fig. 4).

4. Lithography and cleaning/etch markets led the pack in 2005 (left), and the hot markets include expensive 193 nm scanners, thin-film metrology and SEMs, direct-write lithography for masks, and spray cleaners. (Source: Gartner Dataquest)

To view all presentations, visit www.reedelectronics.com/contents/images/BFAST2005r1.pdf.