SAN JOSE -- The chip industry's most advanced wafer fabs were nearly tapped out at the start of 2000, and it now appears unlikely that semiconductor manufacturers will significantly overshoot demand by adding too much new production capacity this year. However, some industry analysts are concerned about 2001, if capital spending continues to accelerate into next year, and if interest rates keep rising.
This week, the Semiconductor Industry Association released new statistics showing just how tight wafer fab capacity was in the fourth quarter of 1999. The report said worldwide fab utilization was at 93.6% of capacity in the fourth quarter--the highest level since the start of the last semiconductor downturn four years ago. Capacity utilization was the highest for MOS process technologies below 0.3 micron, which reached 97.6% at the end of 1999.
"This is incredible considering the big jumps in wafer starts," observed analyst Bill McClean, president of IC Insights Inc. in Scottsdale, Ariz. "This shows the industry is flat out sold out."
The new Semiconductor International Capacity Statistics (SICAS) shows all MOS wafer fabs were operating at 94.3% of their capacity in the fourth quarter last year vs. 91.5% in the third quarter 1999 and 82.9% in the fourth quarter 1998. Bipolar wafer fab utilization was also at a four-year high at 88.8% in the fourth quarter vs. 86.3% in the third quarter of 1999 and 74.1% in the fourth quarter of 1998, according to the SICAS report.
Chip makers processed 517,100 eight-inch equivalent MOS wafers a week during the fourth quarter, an 8% increase over the third quarter when metal-oxide semiconductor fabs were starting 479,900 wafers a week, the report said. Fourth quarter MOS wafer starts last year were 17% higher than in the same period in 1998, the SICAS report said.
The sharpest increase in wafer starts occurred in the 0.3-micron and below category. The SICAS report shows those wafer starts increasing 29% to 461,900 a week in the fourth quarter compared to 358,100 a week in the third quarter.
After delaying major investments for new production capacity last year, chip manufacturers are increasing their capital spending budgets. Last week, Applied Materials Inc. announced it had increased its industry forecast for wafer fab equipment revenues to 46% from its previous estimate of 19% (see Feb. 16 story). And now some market research firms are also beginning to increase their capital spending forecasts as well.
"Everywhere you look, people are saying orders are coming in very strong, and we are now in the process of upgrading our forecast to 42% from 29% at the start of the year," said Risto Puhakka, vice president of operations at VLSI Research Inc., a semiconductor capital equipment research firm based in San Jose. "The foundries have certainly put a stake in the ground, and they are now responding to the huge demand."
Pure-play foundries are attempting to use the current recovery cycle to greatly expand their business with large semiconductor houses, which historically fabricated most if not all of their wafers. Many of these integrated device manufacturers (IDMs) began shifting their wafer fabrication strategies toward third-party foundries as a way to reduce expenses and risk in 1998 and 1999, but now concerns are rising about the availability of capacity.
"The goal of the foundry companies is to convince the IDMs to not build that next fab," noted IC Insights' McClean, who is now expecting a 43% increase in capital spending among chip makers this year. When expenses for "brick and mortar" are taken out, McClean believes the capital spending on production equipment could be up 50% to nearly $40 billion in 2000 vs. $26.4 billion in 1999.
"Wow, here we go again," said McClean, referring to historical trends of overspending in boom times, which eventually contributes to the next downturn. McClean believes the chip industry could absorb a 50% increase in tool spending this year if IC revenues grow at 25-30% in 2000.
"The year we have to be watching is 2001 if the increase in capital spending repeats another 50% increase," he warned.
Currently, huge spending increases are somewhat isolated, McClean said. For example, silicon foundry giant Taiwan Semiconductor Manufacturing Co. Ltd. (TSMC) now plans to increase its capital spending to $4.7 billion in 2000 from $1.7 billion 1999 (see Feb. 24 story). At that level, the world's largest silicon foundry company might end up spending more money on new capacity than Intel Corp., which has earmarked $5 billion for total capital expenditures--including non-semiconductor activities.
Europe's STMicroelectronics is also one of the more aggressive spending with plans to increase its capital expenditures by 63% to $2.2 billion from $1.4 billion, noted McClean. Several others are also increasing capital spending budgets by more than 50% in 2000. "We must watch Samsung, Micron, Hyundai, Infineon and others... if everyone jumps on the bandwagon, then we'll have problems," he said.
So far, recession-battered DRAM makers have been more cautious than foundries or other IC suppliers. Micron Technology Inc., for example, is increasing capital spending by 36% to $1.2 billion in 2000 from $900 million, McClean noted. Currently, Samsung Electronics Co. Ltd. is increasing capital spending by just 33% to $2.4 billion in 2000 from $1.8 billion last year.
The only market segment that appears to be at risk of overshooting demand is flash memory, said McClean. "That market is setting up to be a very hot business this year again after last year's shortages. Suppliers will probably not catch up with demand this year, but there are some big companies seriously chasing the business--Intel, Hyundai, STMicro, NEC, Mitsubishi, AMD and others," he noted. "Flash is ripe for overshooting."