IC Insights: Semiconductor Capital Spending Expected to Drop 9% in 2008

Staff -- Semiconductor International, 12/10/2007 10:55:00 AM

As a result of semiconductor manufacturers putting more emphasis on improving profit margins, capital spending will likely experience a serious hit in 2008, according to the latest report from market analyst IC Insights (Scottsdale, Ariz.). Capital spending slowed down significantly in 2007, and is actually forecast to decline next year by 9%.

To illustrate the current industry climate, IC Insights drew an example from the 3Q07 financial report that UMC (Hsinchu, Taiwan) presented in October, during which the foundry made this statement: “Capex for 2008 will be significantly reduced relative to 2007… From now on, increasing profitability will be UMC’s No. 1 business objective.” According to IC Insights, UMC is just one example of many, and an increasing number of companies in the semiconductor industry have reached their “pain threshold” for pricing pressures and low profit margins. Other major IC foundries and many DRAM producers are expected to follow UMC’s example, at least for 2008.

A 3% increase in capital spending is expected for 2007 after an 18% increase in 2006. The 3% spending increase exactly matches what the surveyed companies, in total, budgeted for the year. Even with Intel lowering its capital spending budget by 15% for 2007, Intel and Samsung are collectively expected to represent ~24% of worldwide semiconductor capital expenditures this year. Given the importance of these two companies, the semiconductor equipment suppliers are waiting with great anticipation for Intel and Samsung to announce their 2008 spending budgets, according to IC Insights.

As of early December, Samsung and Intel had not yet released their 2008 capital spending guidance. Based on what the analyst knows so far, total semiconductor industry capital expenditures are forecast to decline by 9% in 2008 to $51.0B. Depending on what Samsung and Intel budget, the total 2008 industry-wide capital spending level could be about ±4 percentage points from the current forecast, meaning that the best-case scenario for semiconductor industry capital spending in 2008 is a drop of 5%.

The top five spending cutbacks in 2008 are expected to come from major DRAM suppliers: Micron, ProMOS, Samsung, Hynix and Nanya. After increasing total spending for DRAM by 44% in 2006, the DRAM suppliers paid for this overspending with a price collapse in 2007. Heading into 2008, many DRAM suppliers are expected to make big spending cutbacks to restore some sanity to DRAM average selling prices (ASPs) next year.

For 2008, IC Insights is forecasting a 10% increase in the semiconductor market. Assuming this growth takes place, the semiconductor capital spending as a percent of sales ratio for next year would be only 18%, down from 22% this year. At only 18%, it would be the lowest ratio since 2003, the year before the big boom year of 2004 (in which IC ASPs increased 10%). Overall, the industry-wide capital spending as a percent of sales ratio is continuing to trend downwards and is likely to reside in the high teens during the latter half of this decade.