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Chip industry’s midyear sales outlook shows a lot of flash

TOP 10 SPENDERS: Most of the leading companies will spend more on capital equipment in 2006 than they did in 2005. (SOURCE: IC INSIGHTS; ILLUSTRATION BY KAREN SEMANEK)

Semiconductor industry executives may want to hug the next fellow business traveler holding an iPod, or offer a hearty thank-you to the next tourist they see with a digital camera. In fact, they could just choose anyone with any popular electronic gizmo packed with memory chips, and give her a warm smile and a firm handshake.

At the midpoint of 2006, market research firms and trade associations are projecting strong sales throughout the industry’s food chain. Chip demand will stoke fab expansion, which in turn will fuel equipment purchases to fill the factories, particularly in the Asia-Pacific region. Consumer markets are one of the biggest reasons for this upsurge in the industry’s fortunes. Credit all those MP3 players, cell phones, cameras, and PCs.

“Despite sharply higher energy prices, consumer demand for a wide variety of electronic products continues to fuel growth of the semiconductor industry,” says George Scalise, president of the Semiconductor Industry Association (SIA). In early June the trade group revised its 2006 forecast to show a 9.8% growth rate, up from its November 2005 forecast of 7.9%. Under the revised forecast, worldwide sales of semiconductors should reach $249.6 billion.

SIA’s longer-range forecast is equally sanguine. The association projects industry growth of 11%, 12%, and 4% for 2007, 2008, and 2009, respectively. Based on this forecast, worldwide semiconductor sales—which stood at $227.5 billion in 2005—will reach $323 billion in 2009.

Cell phones, particularly third-generation devices, will ring up the largest number of sales, Scalise says. Consumers around the world will purchase approximately 1 billion phones, according to the association. Each phone contains $41 worth of microchips—second only to PCs, the SIA says.

“Other major drivers of demand for semiconductors include personal computers, digital cameras, digital television, and MP3 players,” Scalise says. “Each of these end-markets will grow in double-digits this year, and we expect continued growth through the forecast period.”

Memory manufacturers are making the biggest noise, particularly in NAND flash manufacturing, says Brian Matas, vice president of market research for IC Insights. In the second half of 2006 Matas pinpoints two areas “that will do pretty well. Both of those happen to be in the memory field,” referring to the DRAM and the overall flash segment.

There’s a backstory to the flash upsurge, Matas notes. He says that NAND flash ASPs “probably dropped 40%” for four or five months since the beginning of 2006. One of the main reasons for the drop in selling prices had to do with “a certain MP3” with a “bloated forecast.” An overabundance of flash devices subsequently “had to be underpriced” in order to reduce inventories.

Two of the top three or four NAND flash producers “are expecting a big upturn in demand for the second half of the year. I think that’s one area that’s going to be shining brightly for those manufacturers,” Matas believes. In fact, pent-up demand is such that there’s industry speculation of a potential shortage.

For a month or two earlier this year, manufacturing was “heavily weighted to DRAM for a while” and away from NAND flash in terms of wafer starts, he points out. More recently, manufacturers have dedicated a more balanced share of wafer starts to both memory types.

Matas foresees a potential surge in shipments and in demand for DRAMs as a result of the release of Microsoft’s new Vista operating system later this year or early in 2007. “I think the amount of DRAMs that it requires is as small as 50% more or perhaps twice as much as current systems use.”

It’s not hard to fathom what all this activity means for front-end equipment providers and fab customers. With manufacturing investment in flash memory production on the rise, capital spending projections have reached $55.5 billion, an increase of 17% over 2005, according to Bob Johnson, research vice president for Gartner Dataquest’s semiconductor manufacturing and design research group.

The industry is in such flux right now, that a day or two after Johnson completed a SEMI manufacturing update in early June, “Micron upped its spending by another billion or so” to $3.3 billion in 2006, the executive recalls. In addition, as Johnson was forecasting an 18%–20% increase in wafer fab equipment sales in his presentation, his colleague, managing vice president Klaus Rinnen, was preparing an updated projection for a 25% increase over 2005.

At $57.4 billion in sales in 2006, memory devices will make up the largest share of the semiconductor market at 22.1% of all devices sold, according to Gartner Dataquest’s May forecast. Microcomponents will place second in market share this year at $52.2 billion, or 20.1% of all sales in a market that is expected to reach $259.5 billion on its way to $352 billion in 2010.

Memory manufacturing bears watching, though, for potential snags in the forecast. “We’re concerned about a couple of things,” Johnson says. Although DRAM producers are not investing “as crazy as flash by any means, we still think that DRAM might hit an oversupply position early next year. If that happens, you’ll see a more standard oversupply condition, prices plummet—all that normal stuff.”

In the equipment market, David Jimenez, president of Wright Williams & Kelly, projects “growth through probably the next year and a half, and then after that there will be slowing.” The cost-management firm’s forecast shows the slowdown “could be anything from a flattening from mid-2008 through the end of 2009, or it could be a downturn, depending on whether you’re optimistic or pessimistic.”

The consumer end-market holds the key to factory capacity additions, Jimenez says. “If there’s margin erosion on the IC side, then of course they’re going to cut back in terms of equipment procurement. If they see short-term overcapacity they’ll make cutbacks in capital investments.

Conversely, if we’re going into an overcapacity situation, and we’re still seeing strong market demand, they may not cut back as much. It’s primarily driven by end-market demand, and whether you’re pessimistic or optimistic [about the forecast] depends on the end-market demand in that time frame.

“Personally, I think we’re probably going to see continued strength through mid-2008,” Jimenez continues. The analyst recently returned from an eye-opening trip to Taiwan and other Asian countries, where he spoke to executives of a manufacturer planning to build two 300-mm factories “that will be putting out between 45,000 and 50,000 wafers a month each. That’s just a huge amount of silicon. They’re essentially building ‘superfabs.’ Each one of those fabs is the equivalent of 100,000 8-in. wafers a month, maybe more.”

That type of output raises the potential of a silicon shortage, of course. Competing Taiwanese manufacturers have anticipated this scenario by forming a council “to look at that very issue,” Jimenez notes.

Manufacturers that are normally fierce competitors, such as TSMC and UMC, “have joined forces to look at the silicon issues. It’s not clear that the wafer manufacturers are going to make the investment in capacity expansion given how badly they were burned in the last cycle.”

Asia-Pacific is indeed where the action is, agrees George Burns, president of Strategic Marketing Associates. “Asia-Pacific spending will outstrip any other region of the world. Most of the new fabs are being built there, and it’s where most of the money is.” One core strength helping manufacturers in that region is that it’s “home to more DRAM manufacturing capacity than any other region.”

Burns, too, sees “generally good news” in the midyear forecast, with capital spending projected to increase “by about 15% this year” to $54 billion. Outlays for equipment are projected to grow 14% to $35 billion in 2006, or even higher, according to the company’s April Fab Futures report. Equipment spending should exceed $10 billion per quarter in 2Q07, and any dip in spending in 3Q07 can be attributed to a lack of visibility in fab plans projected that far into the future, rather than an actual downturn, according to SMA.

Spending by manufacturers in the Asia-Pacific region will outpace that of the Americas, Japan, or Europe, accounting for 49% of all capital outlays, Burns notes. Semiconductor producers will break ground on as many as 41 fabs between 2Q06 and 3Q07, while 98 factories will begin equipping or adding volume in the same period. China, at 20 fabs, will have more facilities under construction in Asia than other countries, but Taiwan will outspend all other regions “by a large measure.”

And the United States? “The U.S. is going to do fine,” replies Burns, who projects a 17% increase in capital spending in 2006 over last year. He says Intel, AMD, and Micron all show continued growth. Intel has upped its capital outlay “from $5.9 billion to $6.9 billion this year.”

AMD, in particular, has increased its outsourcing to Chartered Semiconductor in Singapore, “and that’s really helping them in their competition against Intel.”

Burns notes that both AMD and Chartered are in a technology partnership with IBM, which is ramping up a new fab in New York. He also notes that Micron has a new joint venture with Intel for flash memory that involves finally moving into a facility “that broke ground in the 1990s.”

Further confirming what Jimenez saw during his Asian business swing, Burns says one of the biggest current trends is the expansion of 300-mm fab production. “Basically, most of the new capacity today is 300 mm, in terms of either spending or in terms of 8-in. equivalent. It’s definitely a 300-mm world.” SMA issued a May 31 report concluding that the shift to 300-mm wafers that began “with the new millennium should be complete, in the sense that 300-mm capacity will be greater than the capacity for all other wafer sizes, by 2010.”

The report goes on to note that companies and products using the larger substrate size are “overwhelmingly of large volume and advanced technology, such as DRAMs, flash, MPUs, system on a chip, and foundries that produce at the leading edge.” Despite the dominance of 300-mm wafers, however, smaller substrates will continue to exceed 50% of overall capacity. The 200-mm substrates will be used primarily for CCDs, automotive devices, LCD drivers, and similar products.

As for equipment segments looking to do well in the near term, Jimenez says technology drivers to watch for are more metal layers fueling CMP sales and the introduction of 193-nm immersion lithography. Burns also notes that the industry “is moving toward 45 nm fairly rapidly right now.”

Are there any potential snags in the forecast? Of course. On the technology side, hardware isn’t so much of an issue. “I would be more concerned on the software side,” Jimenez says, particularly given the inexorable trend toward 300-mm wafers. “The amount of data generated in a massive 300-mm factory is mind-boggling. You’re talking terabytes. How do you keep track of APC [advanced process control], what wafer needs to be on what machine at what time, and what process you’re running on it?”

Equipment providers may want to be a little cautious about their outlook if the flash market doesn’t pan out as expected, cautions Dataquest’s Johnson. Despite solid bookings and high order rates, “you’ve got to be a little careful about this because in this industry there is no penalty that accrues to the semiconductor guy for slipping a shipment date for the equipment. There are no negative repercussions! Even up to a week before the shipment date.”

In an amused tone of voice, he adds that a chipmaker can claim: “‘I want it on August 1, I want it August 1, I want it August 1—oh, I really don’t want it till November.’ There’s no penalty for that happening up to the moment that damn thing gets on the truck.”

Well, there are fickle customers and then there are fickle customers. Matas of IC Insights acknowledges that the industry forecast was “a little more easy to predict until perhaps the past year or two. We’ve seen an emergence, if you will, of a consumer segment.” Analysts are still trying to determine whether that segment incorporates “steps over the line” into computing and communications products.

But the harder job rests with manufacturers trying to divine where to put their production money and time when the targeted end-market is “driven by low prices and maybe short life cycles when you’ve got to get that product to market right away.” You can anticipate PC demand as well as the number of memory components and microprocessors in each box. “There’s a little sense of predictability,” Matas notes.

“With the consumer end of things, it’s a little more difficult” when you’re dealing with MP3 players and cell phones, for instance, that offer a variety of product features designed to catch the eye and open the wallet. “It’s a little bit more of a fickle audience; it’s hard to predict,” he says about the consumer segment.

For the moment, though, there is no doubt that the semiconductor industry has one sentiment. And that’s hugs all around.—JC

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