Driven by significant investments in the memory sectors, worldwide semiconductor capital equipment spending is on pace to hit $42.3 billion in 2006, up 24.8 percent over 2005, according to Gartner (Stamford, Conn.) on Friday (July 7).

Overall capital spending is projected to hit $55.3 billion in 2006, up 16.6 percent from last year, according to the research firm. The two numbers are larger than the previous forecast, which called for semiconductor capital equipment spending to jump by 14.3 percent in 2006 and overall expenditures to increase by 8.8 percent to $51.7 billion, according to the firm.

In the new forecast, Gartner also raised its forecast for front-end wafer fab equipment, but slightly lowered the projections for packaging gear and automatic test equipment (ATE).

For 2007, the new outlook is gloomy. Overall capital spending is projected to be $53.5 billion in 2007, down 3.3 percent from 2006. Semiconductor capital equipment spending is expected to reach $40.4 billion in 2007, down 4.5 percent from 2006, according to the firm. Previously, it projected growth of 1.2 percent in overall spending and 7.8 percent in capital equipment for 2007.

Gartner analysts said spending cuts will occur in response to a slowing of device production growth. The equipment market decline will start in the second quarter of 2007, and will be relatively short, with the market returning to positive growth in 2008.

"Dynamic random-access memory (DRAM) is hot, and combined with strategic investment in NAND flash capacity, accounts for more than 44 percent of all anticipated equipment spending," said Klaus Rinnen, managing vice president for Gartner's semiconductor manufacturing and design research group, in a statement.

"This is way out of proportion to their relative revenue, which accounts for about 22 percent of the total semiconductor market," he said. "This seems like a sure-fire road to potential overcapacity and future reductions in expenditure, which is the primary reason we counsel caution to equipment manufacturers."

Worldwide wafer fab equipment spending is projected to reach $32.6 billion in 2006, a 25.4 percent increase from 2005. This is up from the previous forecast, which called for an 11.2 percent jump in 2006, according to Gartner.

"On a quarterly basis, the market will reach a high point in the first quarter of 2007, and then it will decline throughout 2007 as the industry slows its rate of expansion to digest the new capacity recently coming online," according to the firm. "Almost 80 percent of the new capacity coming on line in 2006 and 2007 is for 300-mm, as all segments are increasing capacity in anticipation of continuing growth in semiconductor demand."

The packaging and assembly equipment (PAE) market is forecast to surpass $4.9 billion in 2006, a 17.5 percent increase from last year. Gartner previously projected 19.8 percent growth in the segment for 2006.

"Asia/Pacific will continue increasing its dominance for PAE consumption," according to the firm. "Rising from about 70 percent of PAE shipments in 2006, Asia/Pacific will account for nearly 80 percent of all PAE sales in 2011. China is expected to be the largest individual consumer of PAE by 2009, accounting for just under one-quarter of the total market and surpassing Taiwan in that year."

The ATE market appears to be on the way to solid growth for 2006 with worldwide spending growing 28.7 percent. This is slightly down from 29.2 percent growth in the previous projection. "Gartner analysts expect growth coming from all regions and most markets, with memory and system-on-chip (SoC) testers fueling the market's increase."

Recently, Gartner reiterated its bullish 10.6 percent chip forecast for 2006, but the market research firm sees a slowdown and consolidation in the IC industry.

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