Applied Material suddenly turned cautious in November, but the world's leading maker of chip gear only cut its outlook for chip capital spending from 30% to 20% growth.

In December 2000, equipment suppliers were predicting that capital spending by chip makers would climb 22% to $57 billion in 2001, after a year when this spending by chip makers had soared 83% to $46.7 billion. While analysts were beginning to get nervous, they were still looking for 10% growth. "New manufacturing technologies including 300-mm and advanced sub-micron processes are expected to drive equipment orders through 2001," Myers said. In fact, SEMI member companies didn't see any "down" years ahead.

But the picture began changing dramatically. By early January, there was a race to slice chip equipment industry predictions. Dataquest chopped its 2001 forecast from 25-to-30% growth to up only 10%. And the market researcher added there was a chance that equipment sales might even drop in 2001. Changing the picture dramatically was a rush by chip makers to push out their orders out for capital equipment.

By the end of January, the $64,000 question was: Will 2001 equipment sales even match the 2000 total? The book-to-bill ratio for North American suppliers of chip production tools fell sharply to 1.1, lowest reading in two years. "The fundamentals are deteriorating very quickly," commented Morgan Stanley analyst Steven Pelayo.

But some analysts expected capital spending by chip makers to turnaround in the second half, after tail spinning into the red in early 2001. But the cutbacks in chip capital spending plans were accelerating and an inventory buildup was quickly turning into a recession.

In April, North American suppliers of chip production gear posted a record low book-to-bill of 0.42. Worldwide bookings fell to $712 million in April, 41% below March and a precipitous 74% drop from April a year ago. That prompted SEMI to slash its forecast for 2001, predicting that shipments would decline by 27%. But it still expected orders to recover late in the second half and shoot up 22% in 2003.

Admittedly, forecasting is a tough, dirty business. Look at the track record of the experts. In July, 2000, Dataquest said semiconductor capital spending would increase 68% to $58 billion in 2001. But by July 2001, it had chopped its forecast three times and was predicting a drop of 30% for the year. The veteran market researcher had ended up changing its forecast by 100 percentage points in just one year. Morale of the story: don't take market forecasts too seriously.

After hitting a record low in April, the book-to-bill for semiconductor production equipment started improving very slowly. For five months, the ratio moved up-very slowly. Then it slipped again in August, surprising analysts who were looking for the ratio to keep going up.

By late November, more experts were saying the semiconductor equipment business may finally be at the market bottom. But because of low capacity utilization, IC Insights analyst Bill McClean expected another big cut in semiconductor capital spending in 2002, dropping 25% to $31 billion after a 32% fall in shipments this year.

By November, the beat-up semiconductor equipment industry was hard-pressed to come up with an upbeat forecast. The SEMI trade group's consensus forecast predicted that global chip gear sales will drop again next year. Sales in 2002 are expected to fall by 3%, after a decline of 38% to $29.6 billion this year, the largest annual decline ever recorded in semiconductor capital spending. SEMI members figure the equipment market will grow by 29% in 2003 and 23% in 2004, but that is just like the U.S. Weather Service's long-range forecasts. Neither SEMI nor the weather service is ever likely to call it right.

But SEMI's prediction for 2002 was too bullish for Tim Arcuri, analyst for Deutsche Banc Alex. Brown. "We continue to maintain that equipment revenue is likely to decline on the order of 15-to-20% next year." Playing a big role in this, he said, are lackluster fab-utilization rates and possible declines in capital spending for 2002. "The last time we had fab-utilization rates so low was in 1990."

In December, Applied Materials signaled it expects a lousy 2002 by doing something it hates to do--lay off experienced staff. The global chip gear leader was reducing its global work force by 10%, or about 1,700 jobs. "Unfortunately, the continuing downturn requires us to make some tough decisions to align our operations with current levels of demand for semiconductor equipment," says CEO James Morgan.

(Return to 2001 Top 10 list or go to No. 3).