LA JOLLA, Calif. The next semiconductor industry slowdown will hit in 2003, when most of the fabs now under construction will come on stream, leading to capacity glut, forecasters said Tuesday.
"We believe that we will continue to see shortages in the semiconductor market next year and in 2002, but the oversupply will happen beginning in 2003," said Jim Handy, chief semiconductor analyst for Dataquest Inc. (San Jose, Calif.), during its annual semiconductor forecast summit here.
But between now and then, Dataquest also predicts a very healthy surge in business, with the chip market reaching a revenue peak of $336 billion in 2002. The industry should see growth of 37 percent this year, then slowing to 27 percent next year and 14 percent as it reaches its peak in 2002. Overall, Handy said the total sales projection of $295 billion for next year is more than double the revenue figure of $139 billion seen in 1998, which was the low point of the last downturn.
One of the main elements of Handy's forecast model is the DRAM cycle. As a commodity technology, memory's periodic undersupply and overbuilds have made it one of the best historical predictors of the revenue trends for the rest of the industry. From 1998 through 2002, Dataquest expects to see a growth rate of 370 percent in the DRAM business, reaching a sales peak of $76 billion in 2002. That's up sharply from $16 billion in 1998 and $37 billion this year.
The rest of the chip business will see growth through 2004 slower than the historical average of 17 percent. Handy expects instead to see a cumulative growth rate between 1999 and 2004 of 14.8 percent. The non-DRAM portion of the business will not peak in 2002, but will see slight gains of 4 percent in 2003 and 8 percent in 2004. These will be offset by steep declines in the DRAM segment in those years. The total chip industry should see sales of $340 billion in 2004.
This forecast comes during an unusually turbulent period in the high-tech markets. Along with the upcoming national election, oil is reaching record high prices and there is regional conflict in the Middle East. All of these factors are leading to unpredictable events in the stock market, and the tech-dominated Nasdaq exchange has been buffeted for the past few months. While market research firms including Dataquest and others insist that the fundamentals of the chip market remain strong, several of the Wall Street financial analysts have said otherwise.
As early as July, some were predicting that the peak of the chip market's up cycle would be as early as this year or 2001. While the Dataquest figures say otherwise, some of the people attending the conference have voiced the view that Dataquest has historically been optimistic in its forecasts.
Despite this uncertainty, there is some support for the Dataquest forecast here. Charlie Glavin, director of semiconductor research for investment bank Credit Suisse First Boston, downplayed the recent swings in the stock market as emotional reactions, and agreed that the business fundamentals should stay healthy through 2002. Many of his Wall Street colleagues at other firms have had much more dire predictions for the next few years, but Glavin said these are based not on market basics but on a desire to make the market move in any direction. "Right now it is chic to be bearish in this market," he said. "But we believe the cycle will last through 2002."
The key factor in predicting a downturn is manufacturing capacity. When too many fabs come online, the inevitable result is excess capacity, leading to price wars and revenue declines. Klaus Rinnen, chief analyst and director of Dataquest's semiconductor manufacturing group, said that capital spending this year is running at some $58 billion industry-wide, and by 2002 that figure will reach $86 billion. That is almost triple the nearly $30 billion spent in 1998.
Rinnen noted that in the peak years of the last upturn, the industry spent almost 30 percent of sales on capacity expansion, and this year that figure is more than 25 percent. However, historical figures show that the industry can remain in balance if the chip companies spend about 22 percent of their total revenues on capital projects. "We are clearly above that level now, and we are moving into an overcapacity situation."
There are two additional factors that will drive the market into decline. Not only are there several fab projects currently under way, many of them will be using the larger, 300-mm wafers that deliver roughly twice as many chips than the current 200-mm standard. That means that every new, 300-mm fab will deliver twice as much capacity as a traditional 200-mm facility. And those projects are expected to come online toward the end of 2002, just in time for the downturn.
In addition, the DRAM market is shifting its standard product density from 64-Mbit to 256-Mbit, so each memory wafer will deliver four times as many bits. Again, this is expected just in time to help drive the market into a downturn.
"We are in a true capacity buying cycle," Rinnen said. "The industry is safe now, but overcapacity is building."