Cautious. Conservative. Pitiful.
Those were the best words to describe semiconductor capital spending in 2003. While chip demand climbed over the course of 2003, IC makers for the most part held back on capital spending for fear of another dip in the market.
After all, the IC industry is famous for false starts. In early-2002, for example, the market appeared to spike, causing chip makers to scramble and order fab tools at a frenetic pace. Then, the market shortly cooled and tool procurement grinded to a halt.
History tends to repeat itself and why make the same mistake again? This time around, however, it's a different story. There was--and still is--an IC recovery in 2003, but overall capital spending has not reflected the upturn.
By holding back their spending, chip makers appear to be cautious and conservative. Still others believe that IC vendors are paying more attention to profit margins and keeping their fabs full instead of preparing for the eventual upturn.
Some believe IC suppliers are just simply artificially inflating their chip and wafer prices. In any event, one analyst calls the scenario "pitiful."
Exceptions to the rule
There are exceptions to the rule, however. Intel Corp. and Samsung Electronics Co. Ltd. appeared to be competing in a capital spending arm's race in 2003. Several Japanese chip makers---Sony Corp. and Toshiba Corp.--also began to open up their respective purse strings and invested in new capital. And China's Semiconductor International Manufacturing Corp. (SMIC) is also a spending spree.
But still, six companies spent less than 50 percent of their budgets in the first half of 2003, with Taiwan's United Microelectronics Corp. (UMC) spending less than one-third of its planned outlays, according to IC Insights Inc. The other guilty parties: AMD, Infineon, TI, Tower, and TSMC, according to IC Insights (see September 22 story).
The lack of spending put a burr under the saddles of chip-equipment makers, many of which are dying for new orders amid the downturn. And the trend left a bad taste in the mouths of many analysts.
Capital spending delays and other factors caused one research firm to lower its chip-equipment forecast by nearly 50 percent in 2003. The Information Network originally projected that the chip-equipment market would grow by 7.3 percent in 2003. Now, however, the firm projects that the chip-equipment sector will grow by only 3.8 percent in 2003.
"We had anticipated a growth rate of 7.3 percent for equipment in early 2003," said Robert N. Castellano, president of The Information Network, in November. "But semiconductor manufacturers are continuing to under invest despite dramatic growth in its markets in 2003, pegged to increase 14.2 percent," he said.
The analyst is also hopping mad. "These companies would rather risk losing market share than spend money that would lower their profits and affect stock prices--a pitiful situation--which has led us to reduce those forecasts nearly in half to 3.8 percent," he said.
In fact, Q1 2003 over Q1 2002 growth of 11.6 percent gave way to a disastrous Q2 when sales dropped 19.3 percent, because of semiconductor manufacturers' preference of profits over investments and capital spending, he said (see November 4 story).
The final tally for capital spending was miserable in 2003, although chip makers are projected to go on a spending spree in 2004. In total, worldwide semiconductor capital spending is projected to hit $37.1 billion in 2004, up 27.9 percent from $28.9 billion in 2003, according to market research firm Gartner Group. In 2003, worldwide semiconductor capital spending is expected to increase 5.7 percent over 2002.
Capital equipment spending is expected to total $29.5 billion in 2004, up 35.9 percent from $21.7 billion in 2003. Capital equipment spending is supposed to grow 5 percent in 2003 over 2002. The worldwide capital equipment market includes wafer fab equipment, packaging and assembly equipment and automated test equipment, according to the Stamford-based firm in December (see December 19 story)..
One Gartner analyst believes chip makers are playing a risky game. "The industry needs more capacity if it is going to continue to meet increased device demand," said Klaus-Dieter Rinnen, managing vice president for Gartner's semiconductor manufacturing and design research group, in December.
"However, running a fab at high utilization rates leads to high margins and profits, something the industry has been in short supply of for the past few years. As a result, semiconductor manufacturers are playing a risky game-- maximizing profitability, while assuming they can wait until the last minute to commit resources for new capacity," he said.
"For 2004, global capital spending is expected to increase by 28 percent, however, the big question is will the orders for new equipment be released fast and early enough to avoid shortages on the device market," Rinnen said.
"While we have seen encouraging increases in the order rate for new equipment in the past few months, it is still too early to tell. There is still the question as to whether the equipment industry can respond fast enough to the anticipated demand for new equipment. However, it has proven time and time again that it can rapidly ramp its shipment rate in response to an explosion of orders, and we expect it will do so again, provided the explosion occurs," he added.
(Return to 2003 Top 10 list or go to No. 10).