INDUSTRY NEWS

ISS '98

Asian economic woes cloud chip industry forecasts for '98

PEBBLE BEACH, CA—While the keynote speaker characterized the combined Asian financial markets as a sword of Damocles hanging over the head of the entire semiconductor industry, two analysts presented dueling forecasts for 1998 fab equipment sales at SEMI's annual Industry Strategy Symposium here.

Clark Fuhs of Dataquest predicted a meager rise of only 1.8% in process tool sales in 1998 to $22.7 billion. That anemic performance was in contrast to growth of 2.9% in 1997 to an estimated $22.3 billion. A more optimistic Dan Hutcheson of VLSI Research forecast a healthy increase of 24.7% from an estimated $21.6 billion in 1997 to $26.9 billion this year.

After 1998, Dataquest's figures for sales of front-end tools through the end of the century are considerably more upbeat. Sales of $26.6 billion, $37.5 billion, $44.5 billion, and $42.8 billion are forecast for 1999, 2000, 2001, and 2002, respectively. VLSI forecasts increases of 22.4% to $33 billion and 42.3% to $46.9 billion in 1999 and 2000, respectively. A more modest rise of 3.4% to $48.5 billion is forecast for 2001 along with a 5.5% drop to $45.8 billion in 2002.

Dataquest's Fuhs argued that stronger-than-expected tool sales in 1997 will act as a drag on sales growth through this year. Of equal importance, he said, the Asian financial crisis with its currency depreciations will hinder growth by forcing interest rates to rise, thus making capital scarce.

"Japan is a major lender and will be under a lot of stress," Fuhs said. Bank loans are made primarily in the local currency, he noted, but production equipment is purchased in U.S. dollars, thus reducing the buying power of Asian customers.

For his part, Hutcheson pointed out that 1997 was the first time in history that the equipment segment of the semiconductor industry was profitable while the chipmaking segment itself was not. "It's time to be cautiously optimistic despite the Asian situation," the analyst told the audience of equipment and materials supplier executives. He based his optimism primarily on the belief that chipmakers will need to complete the transition to 0.25-µm processes.

Hutcheson stressed that South Korea's economic weakness "is replaced by Taiwan's strength," later warning that "Korea can no longer be the centerpiece of [the suppliers'] Asian equipment strategy." Manufacturers in both Taiwan and Europe will become increasingly important as equipment purchasers over the next five years, he asserted.

Hutcheson said the industry is getting more R&D bang for its buck than it did 10 years ago. The analyst added that process diagnostics tools were the hottest equipment segment in growth during that period and that CMP-related equipment will continue its strong run, with sales reaching approximately $1.5 billion in 2002.

Looking at the big picture, keynote speaker Regis McKenna looked to the East as well. Regarded as a high-tech visionary, the chairman of the consultancy The McKenna Group sees the next several years as a classic good news/bad news scenario. The good news includes the growth of global commerce, the expansion of the Internet, the emergence of interactive television, the introduction of the $500 personal computer, and the ramp-up of 300-mm wafer processes.

The bad, asserted the author and marketing guru, is "the collapse of the Japanese and Asian financial markets." The lack of Asian investment money "could create more global collapse," said McKenna, who called the potential crash "the sword of Damocles" threatening the health of the semiconductor industry.

McKenna's cautious economic assessment was echoed by Vladi Catto, chief economist for Texas Instruments and a perennial prognosticator at the SEMI symposium. He said 1998 "will be a year of challenges for the world economies and the semiconductor industry." The great strength of the U.S. economy is its low rate of inflation, he said. Despite this strength, the U.S. forecast will be imperiled if Japan pulls the American economy into a recession. A drop in the yen/dollar exchange rate to 150—170 yen to the dollar "would trigger economic instability," Catto warned.

Despite this uncertainty, the economist remains slightly more optimistic about the Asia Pacific markets than some of his gloomier counterparts. At 6% the region will have the world's fastest rate of GDP growth and is fundamentally strong with a high savings rate, open markets, and an emphasis on education. The European economy is more export driven than it has been in the past, and he believes 1998 will have plenty of upside potential for the region as producers find new global markets.

Overall, Catto predicted that the semiconductor industry will continue to recover from the 9% drop it experienced in 1996. The industry saw 5% growth last year. Certain "swing factors" could come into play, the analyst stressed. These include the impact of worldwide economies on the chip industry's growth as the semiconductor industry becomes more synchronized with global economic cycles. In addition, a rise or fall of $1 in the price of DRAMs could cause an accompanying 4% increase or decrease in the overall growth of the semiconductor industry in 1998, Catto said.

Calling 1998 "a difficult year to forecast," analyst Bill McClean of IC Insights told the assembled that the semiconductor industry should experience a compound annual growth rate (CAGR) of 20% between 1997 and 2002. What he termed the "Asian wild card" could retard expected growth, though. The company president noted that the slowing Asian economies "will take some of the strength away from the ROW [rest of world] region." Of the four major worldwide IC markets, the ROW region, which includes Taiwan, Singapore, South Korea, and China, will grow the fastest in the 1997—2002 period. Economic uncertainty and currency weaknesses, however, will keep IC market share flat in the region throughout 1998, McClean said, pointing out that South Korea is the weakest among the four Asian ROW member countries. He noted, though, that the country consumes only 15% of the region's semiconductors, which is approximately 3% of worldwide sales.

Tracing the global surplus of capacity to "the supply side of the equation," McClean noted that "it is estimated that spending for semiconductor production equipment as a percent of total semiconductor sales must average about 15—16% in order for producers to keep up with industry demand." Lackluster semiconductor industry growth of 10% or less annually from 1989 through 1993 "caused many semiconductor manufacturers to slash capital spending budgets," he added.

In words that must have been music to the ears of his audience, McClean concluded that IC manufacturers who are successful over the long term must invest in new capacity, "even in the face of a slumping market."

How will the materials markets fare? The materials industry can expect three years of solid growth "despite the turmoil currently affecting the financial markets in Asia, the EMU participants in Europe, and the saber rattling in the Middle East," said Dan Rose, president of Rose Associates. Silicon wafer sales, the largest segment of the materials market, should rise to $6.85 billion in 1998, an increase of 10.5%. He expects the entire fab materials sector to get to the $14 billion mark, an uptick of 10.3%.

Rose noted that because chipmakers must speed up the transition to more advanced processes in order to meet cost and productivity goals, materials suppliers face added pressure to provide new, high-quality materials immediately. Conventional materials from 200-mm wafers to sputtering targets all have "hit a wall," Rose said. The 8-in. substrates are too small, targets are showing unacceptable levels of impurities, and photomasks have pattern imperfections that are unsuitable for next-generation IC production. Because of these challenges, Rose believes 1998 will be a year of "materials revolution," with many conventional materials and processes replaced by newer ones.

Meeting all these demands will put materials vendors with their traditionally wafer-thin profit margins in the pressure cooker. To illustrate the problem, Rose offered an "exaggerated" example: "Develop new materials in one month, ramp to 10,000 units per week in three months, and achieve less-than-three-ppm defect quality levels immediately, while maintaining the same pricing structure as previous generations of materials." Careful planning and meticulous execution, Rose asserted, could help materials suppliers "to avoid many of the pitfalls."

After the symposium's second day of forecasting and technology sessions, one executive from a North American chip equipment vendor confided that he believes analysts are sugarcoating the news. He thinks Japan could head down the same road as South Korea , and he recounted a conversation he had with an executive of a Japanese firm with which his company is working. This Asian exec's assessment? Japan "will have a Korea-like crisis in 12 months." Happy new year!

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