Chip Equipment Demand Down, Prices Start To Fall
NEW YORK -- While economists debate whether there will be a double dip recession, the semiconductor equipment industry has already shown signs of exactly that.
In the beginning of the year, chip equipment companies enjoyed a surge in orders as semiconductor makers geared up for what was expected to be a robust second half.
Since then, a slew of chip makers have cut their capital spending targets, and orders at the equipment makers have declined precipitously.
Take, for example, Applied Materials Inc. (AMAT). Orders rose 50% in its fiscal second quarter ending in April and rose 5% in its fiscal third quarter. But the company expects orders will fall 5% to 15% in its fiscal fourth quarter ending in September.
Meanwhile, Novellus Systems Inc. (NVLS), which saw an increase in orders in the first six months of the year, has said it expects orders will decline about 10% in the current quarter.
Falling Prices
Another bad sign for the industry is evidence that prices are beginning to fall.
Chip makers Micron Technology Inc. (MU) Advanced Micro Devices Inc. (AMD), and Texas Instruments Inc. (TXN) all say they have been able to negotiate lower prices on equipment ordered in recent months.
"What's happening in the industry is customers are going back and trying to renegotiate prices of orders they already placed in return for taking that delivery early or on time," said Timothy Arcuri, an analyst at Deustche Bank.
On the chip equipment side, companies are reducing prices to bolster sales, he said.
Micron spokesman Sean Mahoney said the Boise, Idaho, maker of memory chips has been getting good deals on equipment for the last couple of months.
Texas Instruments has also been able to negotiate lower prices from equipment vendors. But Gail Chandler, a spokeswoman at the Dallas company, said suppliers are particularly open to negotiations for certain tools that will give the vendor an opportunity for further orders in the near future.
"That's where we are seeing the opportunity for lower prices, where (suppliers) are trying to place a particular equipment in hopes you'll be purchasing many in the future," she said.
Meanwhile AMD, of Sunnyvale, Calif., said that with a wider range of equipment providers hawking the same technology, the computer chip maker has been able to focus more on price.
"It gives us an opportunity to make a decision that is cost-driven, rather than technology-driven," said Morris Denton, a spokesman at AMD.
Declining prices for chip equipment isn't surprising considering the current state of the chip equipment industry. Lackluster corporate demand for technology and eroding consumer confidence have weighed heavily on chip makers and thus the equipment vendors.
"It happens in any industry where there are supply and demand pressures," said Ron Leckie, chief executive of Infrastructure, a Dallas research firm. "Pricing pressure usually doesn't come quite so much in capital equipment, but it does happen."
Jack Geraghty, an analyst at Gerard Klauer Mattison & Co., noted that an erosion in prices is indicative "of the low point in the cycle. It's another indication that things are weak and people are nervous."
Still some chip equipment makers says prices have been stable.
Consider Applied Materials. In its earnings conference call late Tuesday, executives said that pricing remains stable. Novellus spokesman Bob Climo said prices for the company' more advanced equipment has held steady.
"Prices are stable for advance technology," Climo said. "We continue to see strong demand." He declined to comment on price erosions in lower-end technology.
G. Dan Hutcheson, chief executive of VSLI Research in San Jose, said that it is likely true that both Applied Materials and Novellus are not reducing the prices on their equipment.
"It's in their deepest disinterest to do that. If they ship the tool at a lower price, it adds to capacity, and they (the chip maker) won't buy the tool at higher price later," he said.
Hutcheson pointed to the fact that both Applied Materials and Novellus' recent earnings results beat expectations, while orders missed targets, as further evidence that the companies are walking away from business rather than slashing prices.
"Stronger companies are not taking the deals," said Hutcheson. "Weaker companies are succumbing to discounting prices." |
