Is chip industry overheating? Yes, say growing number of analysts
By J. Robert Lineback
Semiconductor Business News
(07/06/00, 09:14:25 AM EDT)
SAN JOSE -- Semiconductor managers aren't going to like the sound of this, but the booming chip industry now appears to be planning too much production capacity in the next couple of years, increasing the likelihood of an early downturn in 2002 instead of 2003, according to analysts, who are revising their forecasts.
Many of those new forecasts show chip makers increasing capital spending by more than 60% in 2000, from about $33 billion last year, which was up 12% from total plant investments in recession-riddled 1998. Most industry observers and a growing number of forecasters inside chip companies are becoming concerned about the combined effects of capital spending in 2000 and 2001.
If both years come in with high growth rates in capital spending, the semiconductor business could be in for another rough ride in about two to three years.
"The severity and the depth of the slowdown still depends upon [capital] spending for next year [2001]," cautioned veteran chip analyst Bill McClean, president of IC Insights Inc. "Right now, we're looking at a slowdown in semiconductor revenue growth of probably 8-to-9% in 2002." McClean believes worldwide chip revenues could end up growing close to 40% in 2000 because of strong unit demand and rising average selling prices.
"If the chip industry increases capital spending [from McClean's current forecast of 25-30% growth in 2001], then we are probably looking at 'negative growth' numbers for semiconductor revenues in 2002," added the Scottsdale, Ariz.-based analyst. McClean last month warned his clients that too much capacity coupled with a "growth recession" in cellular phones and an economic slowdown will most likely cause the start of a downturn in 2002 vs. 2003.
Estimates for semiconductor capital spending in 2000 and 2001 continue to spiral upwards. Most industry forecasts at the start of 2000 placed this year's increase in the 25-30% range, but those projection were raised to 40-50% by the end of March. And now, some analysts are looking at as much as a 70% increase in capital spending in 2000.
Dataquest is expected to release its new forecast today, and it will likely increase its outlook because of the flurry of new fab announcements and accelerated spending plans.
A growing number of industry observers are agreeing that chip manufacturers are be repeating old habits by investing too much in good times, causing the next slump. "Our forecast stands at 50% growth [in 2000] and next year we have a forecast of 60%, but the final numbers will be set in September," said fab equipment analyst Risto Puhakka, vice president of research operations at VLSI Research Inc. in San Jose. "Right now, 2001 looks like it's even a better year [for semiconductor equipment suppliers], but if that is the case, then 2002 will be downhill," he quickly added.
If 2001 repeats strong growth in capital spending by chip companies, then 2002 "will probably be a single-digit [percentage increase] year, but it may go negative in 2003," said Puhakka, referring to investments in new production lines.
Puhakka and other analysts suggest that many of the new wafer fabs being announced today might not be fully equipped if chip makers detect a slowing or revenue growth in late 2001. "I'm pretty sure all of the announcements will lead to the building of shells, but then the issue is how fast they are equipped," said the VLSI Research analyst.
Some concerns are also surfacing about the impact of new 300-mm wafer fabs on a supply-demand balance. Some optimistic chip manufacturers are now attempting to speed up their move to 300-mm wafers by accelerating plans for pilot-line facilities in preparation of using the larger 12-inch diameter substrates in production in the 2002-2003 timeframe. This, however, raises the possibility that new 300-mm production lines could be pumping huge amounts of unit volumes into the chip markets at exactly the wrong time, causing some IC segments to become glutted with too much capacity--especially DRAMs, suggest some analysts.
Even in the red-hot cellular phone chip market there's risks of too much volume, according to IC Insight's McClean. He believes the ramp of volume for cell phones will play a major factor in triggering the next downturn in 2002.
"We see the cell phone bubble busting in the next couple years and taking the IC market down with it," he said. McClean sees the compound annual growth rates of cellular phone unit shipments dropping from the lofty 60% range in the past five years to about 25% in 2002 and then down to around 20-15% in 2003.
"Most forecasts show the cell phone market exceeding 800 million hand sets in 2003, but even one billion phones will give you a growth rate of only 25-30% in that year, and manufacturers are not gearing up for that kind of reduction in growth rates," McClean warned.
McClean's current estimate is that semiconductor capital spending will grow more than 60% in 2000 to around $52 billion for equipment and facilities. "We need to get a grip on this," McClean said, referring to the escalation of capital spending plans in the midst of the 2000 boom. He believes the chip industry is heading into the same condition as it was in 1995, when chip shortages and higher average selling prices drove capital spending to a 76% increase over 1994. And then the industry headed into a three-year slump with 1998 being called the worst for capital equipment supplier ever.
"It is beginning to feel a lot like 1995," he said. "This is turning into runaway growth again."
One damper, however, could be a possible shortage of wafers from silicon material suppliers, which were hammered in the last recession with huge losses. "That could throw a monkey wrench into the volume shipments and create a whole different situation in the fourth quarter," McClean said. "The wafer suppliers are gun shy and are waiting a few more quarters before adding capacity.
"It could become a big problem in a few months," he added. |
