Why has the semicon equipment bubble really burst? – II

Here’s the concluding part of my discussion with Dr. Robert Castellano of The Information Network, from New Tripoli, USA.

Repercussions of a deteriorating semiconductor industry
I asked Dr. Castellano regarding the repercussions of a deteriorating semiconductor industry.

He said that the semiconductor equipment industry seems to be in serious trouble. There could possible be little growth in 2011, and the how is that there will be sufficient pushouts in equipment that revenues are moved to 2011 from 2010.

Dr. Castellano said: “We warned two months ago about pushouts, and today, Veeco stated that they “recently experienced rescheduling of tool shipments from the fourth quarter into the first quarter by several customers in Korea and Taiwan.” In other words, pushouts! We will continue to see this more and more.

“Problem is, will the equipment vendors admit it? ASML vehemently denied any customers’ pushouts last quarter, but with tools selling for $35 million each and customers such as Nanya and Inotera announcing losses, there is no way in creation pushouts won’t happen.

“Then, there is the issue of 450mm wafers. The only ones pushing it are the semicons, because they recognized that they could generate twice the number of chips for almost the same capital equipment cost. The equipment industry was dramatically impacted by the 300mm transition, and growth was nearly flat from 2001 to 2009. Not so for the semicons.

“No equipment supplier wants 450mm, it is being pushed by Sematech and Intel, plus a consortium in Europe that feels that perhaps 450mm will knock off competitors and they can make up the vacuum in sales. Only the top 15 equipment suppliers will survive.”

How will pushouts benefit the industry?
On the subject of industry pushouts being highlighted time and again, it is also necessary to see whether and how will these benefit the industry in the long run.

Besides the reasons mentioned above, semiconductor sales are intimately tied to the economy. There is a direct correlation between semiconductor sales and GDP, as well as the PLIs of The Information Network. If the economy is robust, more money is available to purchase electronic items containing semiconductors. The reverse is true, indicative of the present economic climate.

The Information Network has also indicated that firms will announce lower results, and it’d get worse in the following quarter. Why will this happen and which firms could be likely ‘hurt’?

Dr. Castellano said: “This will happen because the crest in the tidal wave was only reached in the past month or so, and it is a long and slippery slope down because it went so high up to begin with.

“The DRAM manufacturers will be hit the hardest. Growth was strongest for them for the first half of the year, where sales grew 135 percent in Q2 2010 compared to Q2 2009.”

Is there a way out? If yes, when?
Finally, when will there be some recovery in the semiconductor equipment sales and why? Surely, as with everything, there has to be a way out!

Dr. Castellano concluded: “We see minimal growth in 2011, again depending on macroeconomic factors. We see two years of downturn in the industry – 2012 and 2013.”

Global semicon market set for slowdown due to deteriorating business climate!

Now that’s going to be very interesting, should it happen! After close to two quarters of robust growth experienced by the global semiconductor industry, a slowdown was bound to be around the corner!!

I was going through a report sent out today, by Dr. Robert N. Castellano, president of The Information Network, New Tripoli, USA, of the same title, and decided to get his thoughts.

Deteriorating business climate

Dr. Robert N. Castellano, president, The Information Network.

According to The Information Network, The business climate for the semiconductor industry is deteriorating, as per its upcoming report, titled, “Hot ICs: Market Analysis and Forecast of the Top 15 IC Sectors”.

As per the report, along with fellow DRAM manufacturers Samsung, Hynix, Elpida, Micron, etc., will suffer from slowing sales of electronic gadgets and PCs. In the CPU sector, the slowdown in PC sales will affect Intel and AMD. Foundries such as TSMC and UMC will also be impacted.

As sales drop in electronic gadgets, the most pronounced affect will be in the DRAM sector, where sales grew 135 percent in Q2 2010 compared to Q2 2009. The drop in semiconductor sales will usher in a corresponding drop in semiconductor equipment and materials sales.

The front-end market will suffer pushouts and the lithography sector will be impacted most, where sales of $35 million immersion DUV tools have flooded the market of late.

Slowdown likely in world economies

I quizzed Dr. Castellano as to why the semiconductor business climate is deteriorating.

He said: The semiconductor industry is directly correlated with the economies of the world, and there is a direct correlation with semiconductor sales and worldwide GDP. Our leading indicators (LI) point to a slowdown in the world economies.

“As these proprietary LIs are correlated with semiconductor revenues, we will se a slowdown in the next few months. We are already seeing signs of a slowdown in the PC and LED indistriies. Numerous public companies have given forward guidance that the next quarter will show some weakness.”

Given the good two quarters this year, how certain is The Information Netwok that the semicon market is now set for slowdown? Dr. Castellano cited similar reasons as above, adding: “Our LIs have an extremely accurate correlation with transition times. We have developed these LIs over the past 15 years.”

What’s the impact on foundries and silicon wafers?

So, how will all of this impact the foundries?

Dr. Castellano said: “Foundries make their money from two sources: sales of ICs from fabless IC companies and sales of ICs from IDMs who do not have sufficient in-house capacity or sufficient technology capabilities for newer ICs. The macroeconomic effect will stymie sales for both revenue sources.”

Does The Information Network foresee an overcapacity situation in silicon wafers during 2011?

“No. We are forecasting 8.4 BSI (billion square inches) of Si wafers in 2010, which is up slightly from the 8.2 BSI in 2008. So, the Si manufacturers have the capacity already on hand. Semiconductor wafers will face competition from solar wafer  consumption, which will double in 2010, but polysilicon is plentiful, and the two sectors, for the most part, use different crystal growing methods,” he added.

It’s back to chip market normal abnormality: Semicon update Aug. ’09

It’s back to chip market normal abnormality: Semicon update Aug. ’09

Here are the excerpts from the Global Semiconductor Monthly Report, Augsut 2009, provided by Malcolm Penn, chairman, founder and CEO of Future Horizons. There are a lot of charts associated with this report. Those interested to know more about this report should contact Future Horizons.

Fig. E1 shows the 12/12 worldwide monthly growth rates for IC sales in dollars, units and ASP for January 1997 to June 2009 inclusive. They need to be looked at in conjunction with the other 12/12 and rolling 12-month charts provided in the Market Summary section of this report.

June’s total semiconductor sales came in at US$19.3 billion, heralding a US$51.7 billion second quarter, up 16.9 percent on Q1-09 (down 20 percent on Q2-08).  This compares with Q1-09 that was down 15.3 percent on Q4-08 (down 30 percent on Q1-08) and confirms our 2009 forecast upwards revision, reported in last month’s Report and at our July Mid-Term Industry Forecast Seminar, that the worst of the chip market recession is now over.

We can now expect a seasonally strong Q3 (albeit not too strong) of around 12 percent growth on Q2-09 (down 16 percent on Q3-08) followed by a normal year-end slowdown in Q4 at plus 3 percent (up 14 percent on Q4-08) confirming our minus 14 percent forecast for the year as a whole.  At last it is now back to industry normal abnormality.

There are wild fluctuations when looked at on an individual monthly basis meaning no single month’s data is a good indicator of the underlying trends. Each month is thus just another peg in the ground, especially during a period of rapidly changing conditions.

June’s minus 25.8 percent year-on-year growth thus looks closer to our original minus 28 percent forecast for the year, rather than the minus 14 percent we reforecast last month, but this does not take into account (a) the prospective second-half-year rebound and (b) the fact we will be measuring future 12:12 growth rates against a dynamic whereby the 2009 numbers are trending up whereas the 2008 numbers were trending down, amplifying the impact of the 2009 positive monthly trends. We should start to see this upward trend kick in again with the release of July’s WSTS data.

Table E1 restates the 2009 growth by quarter for our three growth rate scenarios, reiterating our belief that minus 14 percent is still the most likely outcome, the

worst-case scenario being only minus 16 percent. The forecast is thus relatively insensitive to the actual Q3/Q4 numbers (within reason).

There are still several wild cards however in play. Units are now much better aligned with real demand but ASPs are all still over the map, hardening in memories but weak in logic. So too is near-term fab capacity, with tight-geometry 300mm capacity now getting tight but ‘loose-geometry’ 200mm capacity still plentiful. This will send mixed signal on pricing over the second-half of the year, which in turn is likely to lull the industry into a false state of complacency.

The July move into positive territory of the Front-End Book-to Bill ratio may have finally broken the 34-month spell of a book-to-bill less than parity (i.e., since Sept 2006 aside from the 2 two-month blips), Figure E3, the actual spend numbers are still derisory in absolute terms. Spending is still currently more to do with linebalancing

adjustments than capacity build out and will do nothing to alleviate the 2010 capacity shortage.

The Cap Ex billings run rate is circa $800m/month, supporting a chip sales rate of $16b/month; that is barely 5 percent of sales. So, either we have suddenly got 3x

mega-efficient at building ICs (we have not) or we are building ourselves a massive capacity problem down the road (we are). The foundries (i.e. TSMC) will be the beneficiaries.

Fresh data points are now arriving each week indicating that the global electronics industry is rebounding from its 2008-09 financial meltdown. DRAM and PC sales are up with the impetus for renewed growth and recovery coming from Asia.

The IMF is currently forecasting a return to world GDP growth in 2010 at +2.5 percent, up from its +1.9 percent estimate made earlier this year, but the world could just as easily tip into a second global recession triggered either by the current sharp rise in oil prices or downstream inflation caused by the current excess liquidity and the longer-term need to increase interest rates everywhere.

Interest rate rises will hit everyone very hard indeed, especially those firms and individuals over-extended in debt, currently saved only by interest rates at near zero levels. We are thus nowhere near out of a moribund economy woods, indeed it is more likely to get worse before it gets better making a W-shaped economic recovery the most likely scenario, unless the economic balance of power has shifted to Asia as the new engine of economic growth for the 21st century.

Industry Capacity

Table C1 shows the quarterly semiconductor equipment sales trends for the period Q1-2008 through Q2-2009 inclusive. Total Q2-2009 equipment sales were US$2,666 million, down 13.3 percent from Q1-2009, which in turn was down 34.8 percent from Q4-2008. This represents the fifth successive double-digit quarterly fall in Cap Ex spend, unprecedented in the history of the chip industry.

Wafer processing equipment represented 72 percent of the total, just slightly lower than its 75 percent average. Total Q2-2009 investment represented only 7.2 percent of the quarterly semiconductor sales, although it must be remembered that an equipment sale in Q2-2009 will not produce incremental semiconductor sales until three quarters later, namely Q1-2010.

Q2-2009 wafer fab equipment sales were down 67 percent on Q2-2008, the fifth consecutive quarterly high double-digit drop, with further declines in prospect, albeit at a likely slower rate, bringing 2009’s Cap Ex in at between 50-60 percent down on 2008. Cap Ex levels are now running at levels not seen since the early 1990s when the overall chip market was one-third its current size.

The quarterly trends are not much better with Q2-2009 front end Cap Ex down 17.2 percent versus Q1-2009. This was on top of the four previous quarterly declines of 35.3 (Q1 vs Q4), 22.6 (Q4 vs Q3), 20.3 (Q3 vs Q2) and 27.2 (Q2 vs Q1) percent respectively.

It should not be forgotten that these cutbacks were not triggered by the current chip market recession; the first two quarterly drops, namely Q2 and Q3-2008, took place against a backdrop of strong IC unit growth, i.e. well before the Q4-2008 chip market collapsed. In other words, these cutbacks were premeditated not diagnostic which makes the current capacity dynamics different from before. The cutbacks were thus a clear intent to engineer tight capacity, a strategy that would by now have bitten home had it not been for the cruel interruption of the Q4-2008 market collapse. This time is different … this has NEVER happened before.

Here are the excerpts from the Global Semiconductor Monthly Report, August 2009, provided by Malcolm Penn, chairman, founder and CEO of Future Horizons. There are a lot of charts associated with this report. Those interested to know more about this report should contact Future Horizons.

Fig. E1 -- 12/12 Worldwide IC Monthly Growth Rates

Fig. E1  shows the 12/12 worldwide monthly growth rates for IC sales in dollars, units and ASP for January 1997 to June 2009 inclusive. They need to be looked at in conjunction with the other 12/12 and rolling 12-month charts provided in the Market Summary section of this report.

June’s total semiconductor sales came in at US$19.3 billion, heralding a US$51.7 billion second quarter, up 16.9 percent on Q1-09 (down 20 percent on Q2-08).  This compares with Q1-09 that was down 15.3 percent on Q4-08 (down 30 percent on Q1-08) and confirms our 2009 forecast upwards revision, reported in last month’s Report and at our July Mid-Term Industry Forecast Seminar, that the worst of the chip market recession is now over.

We can now expect a seasonally strong Q3 (albeit not too strong) of around 12 percent growth on Q2-09 (down 16 percent on Q3-08) followed by a normal year-end slowdown in Q4 at plus 3 percent (up 14 percent on Q4-08) confirming our minus 14 percent forecast for the year as a whole.  At last it is now back to industry normal abnormality.

There are wild fluctuations when looked at on an individual monthly basis meaning no single month’s data is a good indicator of the underlying trends. Each month is thus just another peg in the ground, especially during a period of rapidly changing conditions.

June’s minus 25.8 percent year-on-year growth thus looks closer to our original minus 28 percent forecast for the year, rather than the minus 14 percent we reforecast last month, but this does not take into account (a) the prospective second-half-year rebound and (b) the fact we will be measuring future 12:12 growth rates against a dynamic whereby the 2009 numbers are trending up whereas the 2008 numbers were trending down, amplifying the impact of the 2009 positive monthly trends. We should start to see this upward trend kick in again with the release of July’s WSTS data.