News & Analysis
IC equipment vendors live on another planet
Mark LaPedus
12/20/2004 1:28 PM EST
SAN JOSE, Calif. — It was arguably the craziest year ever for the semiconductor equipment industry. On paper, the industry is projected to experience a boom year in 2004. VLSI Research Inc. (Santa Clara, Calif.), for example, projects that the business will grow 55 percent in 2004 over 2003.
On the other hand, the current IC inventory correction problem raised its ugly head in the summer, causing a lull in chip-equipment orders as early as the second and third quarter. By then, the fab-tool market collapsed in several sectors, especially automatic test equipment (ATE).
But even when the inventory correction problem started — and orders begun to slow in the summer — chip-equipment vendors were in denial. At the Semicon West trade show back in July, for example, the industry appeared to reside on two different planets.
On one planet, semiconductor equipment executives were bullish, claiming the current fab-tool cycle will remain robust until 2005 and perhaps beyond. On a separate planet, a growing number of market researchers saw signs of a slowdown in capital spending and an overall deterioration in the semiconductor market (see July 12 story).
More importantly, consolidation in the semiconductor-equipment industry is projected to accelerate, as somewhere between 20-to-40 percent of all vendors could disappear over the next decade, warned an analyst from Gartner Inc. in October. The predication raised concerns among experts about the health of the IC-equipment industry, in which a massive shakeout could stifle competition and hurt innovation.
Dean Freeman, an analyst at Gartner/Dataquest, indicated that less than 10 equipment suppliers in total could satisfy some 80 percent of the IC industry's requirements or demand within the next decade (see Nov. 19 story).
Still, the mood is upbeat about 2004. "It's been a great year," said Kenneth Schroeder, chief executive of metrology and inspection equipment giant KLA-Tencor Corp. (San Jose, Calif.) "I think we have sold the year short. And I think we focus too much on what the future can be without savoring what 2004 has been. The capital equipment industry is up over 50 percent. For our customers, it's been an excellent year too."
For the most part, the market started with a bang and ended with a fizzle. "Business has not dried up, but it is slowing," said Bernie Wood, director of marketing for Nikon Corp.'s U.S. sales arm, Nikon Precision Inc. (Belmont, Calif.).
Without a doubt, it has been a topsy-turvy year. Back in December of 2003, VLSI Research started off with a bullish forecast. The fab-tool market was projected to increase a staggering 40.1 percent in 2004 over 2003, according to VLSI Research.
At the time, the firm also projected that the semiconductor market would grow by 32 percent in 2004 over 2003. In 2003, the semiconductor equipment and IC markets grew about 4.3 percent and 18 percent, respectively, according to the research firm (see Dec. 18, 2003 story).
Then, by the spring, the bears entered the picture. In April, chip-equipment analyst Bill Ong of American Technology Research Inc. in San Francisco downgraded the entire semiconductor-equipment sector from a "buy" to a "hold" rating, due to a lack of capital spending in some sectors (see April 29 story).
In the summer of 2004, Cristina Osmena, an analyst with Jefferies & Co. (New York), an investment banking firm, was among the first to recognize an IC inventory correction problem in the channel. A build up of too much IC inventory in the channels began to impact both the fab-tool and IC sectors (see July 2 story).
Here we go again
Then, starting in the second and third quarter, the ATE industry collapsed, as orders from the packaging subcontractors and IDMs fell off a cliff. Orders for backend assembly gear slowed as well.
Business also went south on the front-end. For example, the industry's bellwether, Applied Materials Inc. (Santa Clara, Calif.), reported decent fourth fiscal quarter results. But the chip-equipment giant believes that its orders will fall by 35 percent in the current period.
Indeed, it's been a bittersweet time for the industry. At present, the general mood is mixed. The IC-equipment market is currently experiencing a slowdown — not a downturn, said Robert Stevenson, vice president of marketing and technology at Kayex CZ Crystal Growers (Rochester, N.Y.), a supplier of crystal pulling equipment.
"Most people are still basking in the glow of a successful 2004," said John Cossins, vice president of commercial operations at Litel Instruments Inc. (San Diego), a supplier of lithography metrology equipment and software. "When I was at Semicon Japan (in December), the mood seemed relatively upbeat despite some predictions that 2005 will be flat to down."
The outlook is also mixed for 2005. "For equipment, we're looking at flat to maybe down slightly. I don't think anybody is predicting equipment to be up in 2005," said KLA-Tencor's Schroeder.
The shift towards the 65-nm node will help the fab-tool industry in 2005, especially lithography, said Nikon's Wood. In general, there will be fewer lithography tools sold in 2005, but there will be a jump in lithographic costs as the industry moves from the 90- to 65-nm nodes, Wood said.
Over the year, however, the analysts have lowered their forecasts. VLSI Research recently lowered its growth forecast for the worldwide IC-equipment market to 0.7 percent in 2005 over 2004, down from its original forecast of 8 percent. The chip-equipment industry will grow 55 percent in 2004 over 2003, said Risto Puhakka, an analyst with the market research firm (see Nov. 18 story).
Market research firm Gartner in December revised its capital spending forecast — again. Worldwide semiconductor capital equipment spending is on pace to increase 61 percent in 2004, but the spending in 2005 is projected to decline 15 percent in 2005, according to Gartner (Stamford, Conn.) (see Dec. 16 story).
"The emergence of excess inventories, macroeconomic uncertainty and slowing end-user demand casts a shadow over the outlook for 2005," said Klaus Rinnen, vice president for Gartner's semiconductor manufacturing and design research group, in a statement. "Device production has slowed in recent months, and with it semiconductor manufacturers have readjusted their capacity ramp-up and equipment purchase plans."
