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Politics : Formerly About Applied Materials

AMAT 223.95

+1.7%

3:59 PM EST

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To: davesd who wrote (9560)	10/25/1997 7:35:00 PM
From: davesd	Read Replies (3) of 70976

post1 As we all know, Fabs for commodity chips are in an overcapacity situation. The signs of this are obvious...DRAM prices at below cost, FLASH prices dropping fast, fast enough to hurt INTC's earnings and force them to rethink capacity expansion. Sure the demand for these chips is increasing, but the supply is increasing at a faster rate causing serious deflation. There are more chips out there than people really need, and capacity exists to make even more if the demand was to increase. Some people think the answer to this problem is for FABs to buy billions of dollars of new tools to lower cost of manufacturing. Well follow this logic to it's conclusion....Taiwan spends upgrading their fabs, Korea follows, Japan follows and so on and it's a bonanza for Semi cap companies...guess what....when the dust settles, all they did was throw more fuel on the fire. You have a worse supply situation cause they can crank out more chips and nothing changed in the demand equation. The margins are just as bad as before or even worse because now they have to pay the interest on the billions they spent on the upgrade, while they are still losing money. And lets not forget they are still paying for their 200mm tools. So, 2 years later the FABs are still losing money and they go to their bankers and say ...hey lend us another $5 billion to upgrade...you see if we upgrade to 300mm, we think we can make money. Because we will be able to produce 2x more chips than before.......and if we don't do it the others will and we will be out of business......and the cycle starts again. Again from an AMAT perspective....WOW what a bonanza..... If the folks in the commodity chip business have a shred of business sense they should see this coming like a freight train....The only solution to this supply problem is...Demand has to go up dramatically and or supply has to be cut back or slowed. INTC has the right idea....stop adding capacity till demand catches up. And I suspect we will see cap spending cuts as we go into 1998 and maybe into 1999. Especially now that the currency in ASIA has thrown in a new monkey wrench into the equation. dave

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