Gartner: Caution, uncertainty extend 2008 capex slump, cloud 2009 recovery by James Montgomery, News Editor, Solid State Technology July 10, 2008 – Things are looking bleaker by the month for companies serving semiconductor makers, as Gartner lowers its capex forecast yet again amid a bursting memory industry bubble, global economic uncertainties, and “little upside potential currently visible for the near term.” The firm started the year expecting about a -10% decline in capex in 2008, then a couple months later widened that to ~-20%. Now, Gartner says it sees a -22.4% decline in semiconductor capital spending. Memory overcapacity and oversupplies (both DRAM and NAND flash) have sunk prices and profits for most memory producers, who now can move unit volumes “only at fire sale prices,” write a trio of Gartner analysts (Bob Johnson, Mark Stromberg, Klaus Rinnen) in their new research report. Memory capex is seen dropping -32.1% in 2008 (vs. a 3% increase in memory sales), though Gartner notes the expected DRAM/NAND spending mix “has changed significantly since last quarter” but the overall picture is still generally the same. Meanwhile, a greater adoption of fab-lite strategies and reliance on foundries for more advanced production will drop IDM spending by -13% this year. IDMs are increasingly in a situation where slowing growth rates and costs required to keep pushing to new technology nodes will necessitate cautious spending. But despite the extra business, foundry spending hasn’t increased reciprocally, instead using that demand to leverage higher utilization rates. Foundries will spend -27.6% less this year, Gartner says, as their attitude changes from “If we build it, they will come,” to “If they come, we will build it,” the analysts note. Gartner still sees a market rebound in 2009 of about 7.6% growth for overall capex, about in line with what it forecasted in April, and peaking at a 18% climb in 2010, better than the 12.5% from its previous forecast. That’ll be followed by another downturn in 2011 (-9.4%) and another rebound in 2012 (7.0%). CAGR for the six-year period through 2012 is a scant -0.9% decline. But the capex comeback after this year is not without risks, Gartner warns, pointing to ongoing oil price hikes (for which the overall effect is still unclear), a possible protracted US economic slowdown, and weakening support for consumer spending for consumer electronics products, and the chips used in them. And the NAND segment is still in danger of continued oversupply that could dampen demand and result in more capital spending cuts. “When all risks are considered, the downside potential for next year outweighs the upside,” Gartner says. In a worst-case scenario, a full recovery in annual spending could be pushed out until 2010. While seeing 2009 as a bounce-back year, “what happens in the equipment market in the fourth quarter will largely determine whether 2009 is positive,” the Gartner analysts write. Currently the firm sees shipment growth returning in 4Q to set the stage for recovery, but “if economic conditions continue to deteriorate, and semiconductor manufacturers continue to restrain capacity growth in the face of uncertain demand through the end of 2008, then prospects for annualized growth in 2009 evaporate, even if a recovery in shipment rates occurs later in the year.” With that in mind, Gartner recommends that equipment manufacturers “should anticipate order slippages and accelerations, continued economic dislocations, and projections of doom and gloom.” WFE: Closely managed investments, but litho & automation hot Looking at equipment for front-end wafer fab equipment (WFE), expect a -21.5% decline in 2008, as chipmakers reduce inventories during 2H08 while keeping utilization rates in the high-80%-low 90% range through the end of 2009, Gartner says. Specific segments will do well, though, notably lithography, as memory firms aggressively push to lower nodes and drive adoption of 193nm immersion tools next year. Also outperforming the market will be factory automation, because even though new fabs aren’t ramped up as aggressively in the past, the first things to go in are material handling systems and software to support any capacity push in response to market demand. Hit hardest will be deposition, etch, and implant (-25% declines) which unlike litho do not change as processes migrate to the next node, so shipment rates largely depend on capacity additions (or as the case is, lack thereof.) Backend spending cautious but poised to soar in 2009 This year will be rough on suppliers of back-end-of-line semiconductor manufacturing equipment, Gartner notes. Utilization rates are in the mid-80% range (though varying wildly by company in memory), and rising commodity prices (e.g. gold wire, copper lead frames, and substrates) are forcing semiconductor assembly and test services (SATS) companies — now included in Gartner’s capex forecasts for the first time — to pass on price increases to their customers. Look for sales to tip back into positive territory heading into 2H08, and by 4Q utilization rates and overall margins should increase. Pressure from the memory segment will hurt pricing for packaging and test, but packaging manufacturers “have been effectively managing their capex and maximizing their production output,” Gartner writes, and with IDMs and OEMs trending to outsource more advanced packaging processes the back-end outsourcing market will outperform the overall semiconductor market. Looking deeper at the backend sector, Gartner’s outlook for packaging/assembly has slightly improved since the firm’s April forecast, with certain segments showing “substantially greater growth” during the period, particularly equipment for advanced processes such as wafer-level packaging (WLP) and 3D/through-silicon vias (TSV), and related inspection technologies. “Traditional packaging tools, such as die bonding and trim and form tools, will be industry laggards during the next several years,” Gartner predicts. In automated test, providers are still cautious but conditions should improve in 2009 “for a nice rebound” hinging on improved macroeconomic and general industry conditions, Gartner says. Test equipment sales will continue to be driven by the Asia/Pacific region (70% of the market by 2012), largely due to outsourcing to SATS providers. System-on-chip (SoC), analog, and radio frequency (RF) test markets will be outperformers, declining less than half the total market. Demand for memory testers will remain weak through 2008, but this segment should get interesting as Teradyne enters the market to compete against dominant leader Advantest. – J.M.