MUNICH -- Industry observers and chip managers are keeping a weary eye on integrated circuit unit volumes as a key indicator of where the semiconductor business goes next.
After peaking last October at 7.7 million units, IC shipments fell off sharply to about 6.5 million chips in February as system makers cleared their bloated inventories, but now--after a terrible first quarter 2001--there is wide disagreement about the potential for unit volume growth this year.
Weakening market conditions have caused Dataquest Inc. to slash its forecasts for both semiconductor and chip-making equipment markets. During a session at the Semicon Europa trade show here this week, analyst Klaus-Dieter Rinnen, director of semiconductor manufacturing analysis at Dataquest, said the research firm is now expecting chip revenues to fall 16%. If business conditions erode even more and the inventory burn-off extends beyond the third quarter, the drop could be more like 23% in 2001, he warned.
San Jose-based Dataquest also cut its forecast for semiconductor equipment revenues to a decline of 24% in 2001 after forecasting a 6% drop earlier this year. Dataquest is currently forecasting a 4% drop in 2002 as the chip industry begins to use up its excess capacity, but still delays new plant projects.
Rinnen said Dataquest isn't forecasting IC unit shipments, but it is predicting a slight decline in silicon wafer use by the industry--down a couple of percentage points from 2000. "The forecast of 16% decline is similar to what we saw in 1985," he said, suggesting there is a strong possibility of a negative year in unit shipments.
What's making industry analysts nervous is the potential for negative IC unit volumes at a time when chip production capacity is way under utilized.
"There has only been one year in history when IC unit volumes declined , and there have been just two years when shipments were flat--one of them being 1998," observed Elizabeth Schumann, director of industry research and statistics at the Semiconductor Equipment and Materials International (SEMI) trade group. During a market briefing session at SEMI's Semicon Europa today, Schumann said it's now beginning to look like 2001 will be the second year in history that IC units volumes decline.
While a growing number of industry observers are seeing that possibility, semiconductor equipment analyst G. Dan Hutcheson of VLSI Research Inc. disagrees. He maintains that unit shipments are not dropping, and he has reasons to believe that March was the bottom of the current slump.
"Pricing on ICs has held firm since September, and it's now strengthening in some segments," he told SBN. "This is the light at the end of the tunnel--but is it a train?" added Hutcheson, being unable to resist the quip.
Hutcheson was only half joking about the "train" because while he believes the industry has reached the bottom of the downturn, he says it will take longer for chip and equipment market to recover fully.
"We certainly won't bounce off the bottom like we normally do," he said. Hutcheson said VLSI Research is predicting nearly a 20% drop in semiconductor revenues in 2001, with capital spending also falling about 19%.
Part of the reason for a longer stay at the slump's bottom is that slower economic growth is spreading from U.S. to Europe and Asia. Analysts said they are also concerned about some of the potential growth drivers for IC consumption--especially the much-ballyhooed third-generation cell phones following this week's postponement of the world's first 3G service in Japan (see April 24 story).
But VLSI Research's Hutcheson said new data shows the chip manufacturing sector beginning to stabilize after semiconductor companies acted faster than usual in shutting down production lines in response to the slowdown. "In 1996, when the business started to decline, chip companies did not respond and it wasn't until 1998 that they began to close fabs," he recalled. "That delayed reaction is happening in this downturn."
New industry data now shows wafer fabs capacity utilization most likely to edge up slightly in April after hitting a low point of 80.8% in March, according to Hutcheson, who is president of VLSI research. The chip industry's fab utilization peaked at 98% in August 2000. Hutcheson said his firm now expects to see fab capacity utilization at about 82% and slowly moving up to around 91% by December.
The backend chip-assembly segment and final test markets have a longer way to go for a recovery after contract manufacturers in Asia attempted to expand their operations in the 2000 boom. VLSI Research's data shows assembly capacity utilization at 69.4% in March, while test utilization was at a just 71.1% last month.
"Right now the industry's wafer fabs are running at mid-1999 levels," Hutcheson said.
Other analysts place the fab utilization figure for the second quarter more around the 70% range, and they say it is not clear if that percentage will move up much higher before the end of the summer. Silicon foundries have been the hardest hit by a fall off of fab utilization because a number of integrated device manufacturers (IDMs) have pulled back outsourced production to their own plants. Large foundries have recently reported utilization rates of 50-to-45%, but Hutcheson said for some operations in Asia the figure has fallen well below 40%.
Earlier this month, IC Insights Inc. in Scottsdale, Ariz., forecasted a 6% drop in IC unit volumes to 81.4 billion in 2001 from 86.5 billion in 2000. In 1985--the only other year when IC unit shipments dropped, the industry was also in an inventory-burn off mode, noted the research firm. In that year, IC unit shipments fell 16% from the previous year.