NEW YORK -- Capacity utilization rates are rising steadily across the semiconductor industry, but chipmakers are generally hedging their bets and waiting for an improvement in average selling prices and profit margins before increasing capital expenditures.
After being mauled in the last downturn and still failing, in many cases, to generate cash flow because of crushing pricing pressures, most suppliers announced modest capex budgets at the beginning of 2003 and have kept these relatively unchanged through the first nine months of the year.
Industry executives said that the cautious spending environment is unlikely to change until late 2004. "We're just entering the new growth cycle and the priority is cash and higher margins," said Jean-Philippe Dauvin, Paris-based chief economist for STMicroelectronics N.V.
"Semiconductor companies are being very cautious because shareholders want a couple of quarters of higher margins before accepting an increase in capex," Dauvin said.
Industry sources contend that the current situation is unlikely to jeopardize the supply of crucial components at equipment manufacturers. Enough capacity exists and additional plants can quickly be brought on line if demand spikes, they said.
Only a few sectors, especially DRAM where memory makers are seeking competitive advantage by transitioning faster to 300mm technologies, will experience higher investments in the near term, they said.
"Memory makers continue to expand leading-edge capacity and transition to smaller feature sizes, in an attempt to gain a cost advantage," said Len Jelinek, an analyst at iSuppli Corp., El Segundo, Calif.
"Improvements in capacity utilization at CMOS logic companies are being driven by conversions to next-generation technology," he added.
A review of capital expenditure budgets at 11 leading chip manufacturers and foundries indicates that most spending is tracking earlier forecasts, according to IC Insights Inc., Scottsdale, Ariz.
Of the 11 companies, including traditional big spenders like Intel, Samsung, ST, and Taiwan Semiconductor Manufacturing, there appear to be no plans to raise equipment spending for the rest of the year.
IC Insights estimated that Intel Corp. will spend about $3.7 billion in 2003, and although the Santa Clara, Calif., company had already shelled out $1.9 billion by the middle of the year, it is unlikely to add to its budget. ST's Dauvin said the company is sticking to its 2003 projected capital expenditure of $1 billion, and estimates that total industry equipment spending for 2003 "will grow by up to 5%, while the first half of 2004 will be relatively slow with growth in the range of 15% to 20% for the whole year."
A spokeswoman for Taiwan's United Microelectronics Corp. confirmed that the foundry expects to spend $500 billion on capital equipment in 2003 and is "unlikely to spend more." At the end of the first half of 2003, UMC had spent only $156 million of its full-year budget, she said.
The situation is slightly different at Advanced Micro Devices Inc., Sunnyvale, Calif. The company initially budgeted $650 million for 2003 capital expenditures but raised this to $725 million after merging its flash memory business with that of Fujitsu Ltd. to form Fujitsu AMD Semiconductor Ltd. (FASL).
"The new capex guidance is understandably a result of FASL, which is normal when you embark on a new venture like this," said a spokesman for AMD. "Our capex in the first half was $283 million, and we are still well on track with our projection."
If semiconductor equipment makers are looking to China for relief, they are not likely to get any, according to iSuppli's Jelinek. Although China is widely acknowledged as the fastest-growing region for electronics production with its chip producers eagerly adding capacity, most of the fabs coming on line in the country are deploying older technologies. The new China facilities are being stocked with equipment from already depreciated Western plants that chipmakers are selling off as they shift to newer technologies, he said.
"The initial Chinese expansion is being driven by used equipment and there is a glut of such equipment right now," Jelinek said. "Next year we will see a big jump in capital expenditures for China once SMIC starts putting in equipment at their 300mm fab, and if other manufacturers in the country jump in at that process level."
Next year and 2005 hold considerable promise for stronger capital expenditure growth, however. Both ST's Dauvin and Jelinek expect global chip capex to expand 20% in 2004, to approximately $38.8 billion from $32.6 billion in 2003. iSuppli estimates capex will grow only about 8% on the upper end this year.
"If we see a sustained recovery that confirms the latest bounce is not a back-to-school effect"and we should know by November"then you're going to see some companies break loose and raise their capex," Jelinek said. "Until then, companies are a little leery of adding capex because they see all these empty shells around."