The SIA's quarterly capacity report shows wafer starts in chip-fabrication plants surging 6.8% in the third quarter from volume run rates in the second quarter, putting this year on a record pace for increased unit output, said industry observers. The chip industry's capacity was 2.171 million six-inch equivalent wafer starts per week in the third quarter vs. 2.034 million in the prior three-month period, according to the new Semiconductor International Capacity Statistics (SICAS) report.

The strong increase in wafer fab capacity comes at a difficult time for chip manufacturers, which are attempting to deal with cut backs in new orders by major customers and inventory adjustments in key end-user markets, noted analyst Bill McClean, president of IC Insights Inc.

"If this [rate of increase] continues in the fourth quarter, we're looking at wafer starts increasing 25% this year," McClean said. "In 1995 [the last boom year for chip growth], wafer starts increased 22%. This year could be a record for wafer-start capacity increases."

The new SICAS report also shows total integrated circuit fabs running at their highest capacity utilization rate since the mid-1990s. In the third quarter, IC fabs were operating at 96.4% of their installed capacity vs. 95% in the second quarter and 90.9% in the third quarter of 1999. The low point in IC fab capacity utilization hit the industry during the third quarter of 1998, when the rate was down at 80.8%.

The surprising jump in third-quarter capacity comes at a time when relatively few new major wafer fabs are coming on line, according to McClean. Capital spending by semiconductor companies is at an all-time high in 2000, climbing nearly 80% from last year, but much of those investments in fabs and new equipment will not be felt until next year or 2001.

"We have hard some inventory concerns [in PCs and cellular phone segments], and overall economic concerns, and now capacity concerns," said McClean, who is based in Scottsdale, Ariz. "The third quarter capacity came in very strong, which is now bad timing.... Six months ago that capacity would have been a welcomed site, but six months from now new capacity might be very unwelcomed," he added, expressing increased concerns about 2001.

McClean has cut back his forecast for capital spending in 2001--based on meetings with chip makers--to 10% or less vs. 79% in 2000. "Just like the IC manufacturers jump in with both feet in capital spending this year, we will see capacity spending turned off pretty quickly at the first real sign of weakness," he predicted.

The Scottsdale-based analyst said he believes the strong third-quarter capacity growth could be traced to existing chip plants squeezing out more unit volume with extra work shifts and new tools that have higher throughput rates. "I was disappointed in the numbers," said McClean, meaning he was alarmed at the additional capacity coming from existing fabs. "We're still trying to get a handle on where all these wafer starts are coming from--they could be from fabs moving to seven-day work weeks with three shifts or higher equipment throughput."

The SIA report--based on statistics collected worldwide by the SICAS organization in Vessem, the Netherlands--shows strong increases in wafer-processing capacity in MOS integrated circuit fabs. Capacity in MOS fabs jumped 7.3% to 1.949 million eight-inch equivalent wafer starts per week in the third quarter compared to 1.816 million in the second quarter, said the SICAS report.

In the world's most advanced MOS fabs, capacity surged 15.7% to 720,700 eight-inch (200-mm) equivalent wafer starts per week in the third quarter vs. 623,100 in the second quarter, said the new report. In nearly all segments of MOS-chip processing, capacity increases were more than double the growth in the previous quarter (see Aug. 28 story).

Bipolar wafer starts increased at a more moderate rate of 2.2% to 320,400 five-inch equivalent wafer starts in the third quarter compared to 313,600 in the second quarter, said the new SICAS report, which was released last week by the SIA.

Capacity utilization in bipolar fabs was at 90% in the third quarter, down slightly from 90.7% in the second quarter, according to the SICAS report. In the third quarter of 1999, bipolar fabs were operating at 86.1% of their installed capacity. In the third quarter of 1998, bipolar fab capacity utilization was at 76% and the rate bottomed out in the fourth quarter of 1998 at 74.1% during the last industry downturn.

MOS integrated circuit fab capacity utilization in the third quarter kept climing, hitting an astonishing 97.1% rate, said the SICAS report. That's up from 95.5% in the second quarter and 91.5% in the third quarter of 1999.