Separate announcements this week from Intel Corp. and Microchip Technology Inc. that fab projects will be pushed out by up to a year are challenging industry convictions that the market is wading through a short-term pause in its latest upturn.
The modest retrenchments, coupled with word from Microsoft Corp. that a global economic cooling will hurt its fiscal second-quarter earnings, is leading some analysts to predict a slowdown in capital-equipment spending as the market sifts through conflicting forecasts.
Microchip said it will push back the start of a new facility in Puyallup, Wash., from August 2001 to June 2002. The company said it will also delay capacity expansion plans at its fab in Tempe, Ariz.
Industry bellwether Intel is delaying the opening of its wafer fab in Leixlip, Ireland, until the second half of 2002. The company attributed the pushout solely to a decision to dedicate the fab to 300-mm wafers instead of the 200-mm production originally called for, though observers noted that the move would also mean fewer wafers produced by Intel in 2001.
The fab delays followed close on the heels of warnings from the two companies that fourth-quarter revenue would be below expectations. Intel said fourth-quarter revenue would be flat from the third quarter, when it reached $8.7 billion.
Microchip, Chandler, Ariz., whose chips are used in non-PC devices, said net sales in the current quarter should be flat with the $176.3 million reported in the fiscal second quarter, plus or minus a couple of percentage points.
The announcements came just days before Microsoft said it would miss revenue and earnings forecasts by up to 6% in its second quarter ending Dec. 31, and by about 5% for the remainder of its fiscal year.
Microsoft attributed the disappointment to slack PC sales, though the company said its long-term outlook for the IT and PC markets remains positive. Still, far from the temporary inventory overhang that promp-ted recent earnings warnings from semiconductor vendors such as Altera Corp. and component distributor Avnet Inc., Microsoft said its troubles stem from softening global demand for its products.
"We believe ... that the current weakness in worldwide economic conditions is resulting in a slowdown in PC sales, corporate IT spending, and consumer online services and advertising," said John Connors, Microsoft's chief financial officer, in a statement.
On top of Microsoft's warning, the plant delays by Intel and Microchip are adding fuel to speculation that other capital expansions may soon be deferred.
"It's not unreasonable to believe that when demand issues come up, companies want to review their capital expenditures," said Hans Mosesmann, an analyst at Prudential Securities Inc., Menlo Park, Calif. Intel's decision to push out the Leixlip fab by a year was a clear indication the company is cutting its expectations for chip demand for 2001, he added.
Another Prudential analyst, Pramanick Shekhar, issued a report last week that predicted Intel's capital spending will fall as much as 38% in 2001, to between $4 billion and $5 billion. He expects industrywide capital spending to fall 7% after surging more than 60% this year.
"We just visited Asia last week, and all the major guys in Taiwan, Korea, and Japan are saying that, at best, capital expenditures will be flat," Mosesmann said. He predicted that Asian chip makers will soon be scaling back some capital spending plans for 2001.
When asked if Intel's fab delay might prompt other companies to follow suit, Risto Puhakka, an analyst at VLSI Research Inc., San Jose, said equipment orders have been slowing.
"Several companies I talked to indicated that demand for chips could start affecting equipment orders," Puhakka said. "Everybody is evaluating their capital-expenditure plans. The fact that Intel has put the Ireland fab on the back burner is an indication that the expected demand is not there."
Nevertheless, Puhakka said VLSI Research was still forecasting capital-equipment sales will be flat to slightly higher in 2001, a sharp contrast from the prediction being made by Prudential Securities. "Things haven't gotten so bad that companies are having layoffs," he said.
Intel declined to discuss its capital spending plans, but will make a public disclosure Jan. 16, said Intel spokesman Chuck Mulloy.
Apart from the Ireland fab, Intel is still proceeding on schedule with its other wafer-fab programs, Mulloy said. Those include the refurbishment of Fab 17 in Hudson, Mass., which it acquired from Digital Equipment Corp. Intel last week said it will spend $1 billion to upgrade the 200-mm-wafer microprocessor plant, expanding clean-room space by about 50% and adding equipment capable of making Pentium 4 and Itanium chips.
The company will also move ahead with the ramp-up of Fab 23, a flash-memory plant in Colorado Springs, Colo.; the completion of a 300-mm-wafer development fab in Hillsboro, Ore.; the build-out of Fab 22 in Chandler, Ariz.; and the expansion of Fab 11 in Rio Rancho, N.M., Mulloy said.
He called the decision to postpone the opening of the Leixlip fab "purely a technology asset utilization question." The plant was to have been Intel's last 200-mm-wafer fab, and would have been converted to 300-mm a few years after it began production. By changing it to a 300-mm fab from the outset, the facility will have per-wafer operating costs that are 30% lower, while producing more than twice the die per wafer than a 200-mm fab.
But Intel's decision could also spring from a soft PC market and the slowing worldwide economy, said Dean McCarron, an analyst at Mercury Research Inc., Scottsdale, Ariz. It "potentially could reflect a change in Intel's expectations of what its market share could be. They may have thought it would be 90%, and now it may turn out to be 80%. That could have an impact on their planning."
McCarron added that Intel's move toward newer process technologies throughout its many fabs will mean it can produce more chips using fewer wafers, also enabling the company to delay opening the Irish fab.