1Q03 Scenarios: Semiconductor Capital and Equipment Spending

Transcription

1 Forecast Analysis 1Q03 Scenarios: Semiconductor Capital and Equipment Spending Abstract: Entering 2003, improvements in industry fundamentals point to growth, but uncertainty remains. How will it play out? Several scenarios for the industry's recovery are possible. By Klaus-Dieter Rinnen and Jim Walker Strategic Forecast Statements The semiconductor wafer fab equipment industry has the potential to experience a first year of expansion in 2003, most likely 15 percent over 2002, based on improved supply conditions and gradual advances in chip demand. The quarterly revenue picture shows a double-dip profile, with the second leg in the fourth quarter of 2002 and the first quarter of 2003; we anticipate some reprieve in the second quarter and stronger gains in the second half of 2003 as utilization moves from a 75 percent plateau in the first half. Gartner Dataquest estimates wafer fab utilization to end 2003 at 85 percent and leading edge to be about 95 percent at the end of this year, setting up for a strong Publication Date: 17 January 2003

2 2 1Q03 Scenarios: Semiconductor Capital and Equipment Spending Forecast Overview This Gartner Dataquest Perspective is a companion piece to two Gartner Dataquest Alerts issued earlier in December of 2002 (see "Semiconductor Packaging and Assembly 2002 Review and Outlook" [SEMC-WW-DA- 0066] and "Positive Outlook for Wafer Fab Equipment in 2003" [SEMC- WW-DA-0068]). In those documents, we stated our opinion and outlook for the semiconductor manufacturing segments, wafer fab and packaging and assembly. While the current downcycle defies statistics from the past, it does not defy fundamentals. As we look at 2003, a high degree of uncertainty remains for what the new year will bring. Still, we expect gradual economic improvements throughout the year, leading to a revival of business confidence and spending, albeit at varying rates. We are forecasting growth of 6 percent in electronic equipment production revenue to lead to a modest revival of 12 percent growth in semiconductor device revenue. However, based on improvements in supply-side fundamentals, we believe that end-user demand improvements will rapidly map into new equipment demand. With that, 2003 could bear an upside surprise to the doom and gloom on Wall Street and in the industry. Consequently, we are calling for expansion of about 15 percent in capital spending and 17 percent for capital equipment (wafer fab and packaging and assembly combined). Our equipment scenarios reflect the high degree of uncertainty in the end-user demand picture. For example, for wafer fab equipment, we project growth of 3 percent and 28 percent for our downside and upside scenarios, respectively. This Perspective takes a closer look at the upside and downside scenarios that we project for the next two years. Forecast Scenario Commentary General In this section, Gartner Dataquest introduces its forecast scenarios for both wafer fab and packaging and assembly equipment. Along with the forecasts, we have compiled a list of trends that influence these forecasts. In the quarterly picture, improvements in overall utilization and foundry, especially during the first half of the year, led to some improvements in spending. However, because end-user demand was slower than projected, equipment demand has recently slowed. The flat utilization picture for the first months of 2003 equates to slow growth in wafer fab equipment sales during this period. Still, equipment will be sold, and the majority of that will go for upgrades and incremental capacity increases as needed at fabs throughout the world. These marginal increases will tend to keep leadingedge utilization rates from rising above 90 percent in the first half of 2003.

3 3 As the year advances, we anticipate that the capacity-buying component will strengthen as companies move more aggressively to fill shells. Our quarterly forecast has a rather smooth and well-behaved pattern, and we again find ourselves in the bind of a back-end-loaded profile. An earlier increase in quarterly spending could provide some upside for the year, just like a stronger year-end acceleration. However, the likelihood for this is low. On the other hand, downside risk for 2003 remains, especially if macroeconomic uncertainty continues to linger and zaps the strength of a corporate spending recovery, which is anticipated for the second half of Consequently, we estimate a flat 2003 in a year-over-year comparison on the downside. Given the harsh cuts over the past two years, 2003 should be a positive one for the industry. For each forecast scenario, we have arrayed a set of assumptions that lead us to forecast independent sequential quarterly growth patterns. It is important to recognize, for example, that the best-case scenario will not necessarily have the best sequential growth rate, and vice versa, the worstcase scenario does not necessarily have the worst growth in any quarter listed. Therefore, sequential quarterly or annual growth rates for the worst-case scenario can exceed those of the best-case scenario. All data refer to Staff Accounting Bulletin (SAB) 101 revenue. Wafer Fab Equipment Market Changes Compared With Previous Forecast In November 2002, Gartner Dataquest provided its previous version of this forecast (see "4Q02 Semiconductor Capital and Equipment Spending Scenarios" [SEMC-WW-DP-0212]). Significant changes to that forecast follow. Additional Drivers and Inhibitors The following drivers and inhibitors could affect the wafer fab equipment forecast scenarios: Drivers As stated earlier, the macroeconomic picture shows a high degree of uncertainty. This breeds ultraconservatism in companies' spending practices. Once uncertainty turns into certainty, risks can be calculated and acted on. With certainty developing, we anticipate some risk taking to return to the spending picture. For 2003, a PC recovery based on a renewed replacement cycle in the corporate environment is essential for any major improvements in semiconductor demand. Chip sales grew on a sequential basis every quarter in 2002, leading to an expansion of the market in Consequently, wafer fab utilization improved 25 percent from the third quarter of 2001 to the fourth quarter of We expect weakness in chip sales in the first half of 2003, but a second half acceleration should result in 12 percent growth year over year.

4 4 1Q03 Scenarios: Semiconductor Capital and Equipment Spending Leading-edge utilization is tightening; it has dropped to the high 80 percent range. However, with more leading-edge designs being implemented and yield issues at 0.13 micron coming under control, we anticipate utilization to rise rapidly, ending 2003 at 95 percent. Consequently, equipment demand could jump. Longer lead times for the latest technologies, especially for steppers, could be an issue as demand grows. Inhibitors Lingering uncertainty in the macroeconomic picture keeps companies from investing, impacting PC growth and overall electronic equipment consumption in The 2002 holiday season appears to have been soft. Inventory overhang could overshadow and impact fab utilization in the first half of Corporate spenders remain cautious. Although corporate buyers will likely renew spending somewhat in 2003, the question is still by how much and when. We must remind ourselves that corporate spending budgets are set on an annual basis and are likely to be conservative. The environment at the end of 2002, with a beaten-down stock market and a high degree of macroeconomic uncertainty, was clearly not conducive to aggressive upward revisions over the prior year. While we anticipate improvement in the macroeconomic picture, will it be too late? Will a sizable budget flush occur in 2003? We anticipate that foundry spending will rise ahead of the overall industry in This call clearly involves considerable risk, given the rather volatile behavior in this segment. Increasing dynamic random-access memory (DRAM) investments will perpetuate an overcapacity situation in this segment, but investments could be downward adjusted if PC demand weakens significantly below expectations. To regain and bolster earnings potential, equipment makers have trimmed their excess through additional workforce and capacity reductions. However, will there be enough capacity for companies to react to a sudden surge in demand? We anticipate that lead times will lengthen as the recovery picks up steam, leading to a more gradual ramp in revenue.

5 Forecast Range Tables 1 through 3 provide quarterly and annual revenue, sequential, and year-over-year forecast scenarios for the wafer fab equipment market. Table 1 Worldwide Wafer Fab Equipment: Revenue Forecast Scenario (Billions of Dollars) Best Case Most Likely Case Worst Case Best Case Most Likely Case Worst Case Best Case Most Likely Case Worst Case Table 2 Worldwide Wafer Fab Equipment: Sequential Growth Forecast Scenario (Percent) Best Case Most Likely Case Worst Case Best Case Most Likely Case Worst Case Best Case Most Likely Case Worst Case

6 6 1Q03 Scenarios: Semiconductor Capital and Equipment Spending Table 3 Worldwide Wafer Fab Equipment: Year-Over-Year Growth Forecast Scenario (Percent) Best Case Most Likely Case Worst Case Best Case Most Likely Case Worst Case Best Case Most Likely Case Worst Case Packaging and Assembly Equipment Forecast Assumptions Changes Compared With Previous Forecast In November 2002, Gartner Dataquest provided its previous version of this forecast (see "4Q02 Semiconductor Capital and Equipment Spending Scenarios" [SEMC-WW-DP-0212]). Significant changes to that forecast follow. Additional Drivers and Inhibitors The following drivers and inhibitors could affect the packaging and assembly forecast scenarios: Drivers Capacity utilization rates will increase from just below 65 percent entering 2003 and exceed 80 percent by year-end Flip-chip technology for graphics and advanced microprocessors will grow to meet the faster speed demanded by consumer and automotive markets in The drive for higher-frequency packaging, along with the pressure to adopt advanced packaging concepts, will prompt companies to follow through on spending commitments to avoid falling behind the competition. DRAM memory modules in dual in-line memory module (DIMM) format will make the transition to three-dimensional (3-D) stacking and system-in-a-package (SIP) to meet the higher speed required by thedoubledatarate(ddr)architecture.

7 Leadless chip carrier-style packages, such as quad flat no lead (QFN) and small outline no lead (SON), will increase exponentially in 2003 as replacements for the small outline integrated circuit (SOIC) and small outline transistor (SOT) packages. The outsourcing model adopted by Toshiba and Fujitsu will spread to other original equipment manufacturers (OEMs) and integrated device manufacturers (IDMs) in Japan. The demand for thinner packages with bond pads spaced more closely will increase throughout IDMs and semiconductor assembly and test services (SATS) companies will accelerate their transition to China as a manufacturing hub. Lower manufacturing costs, government incentives, and a huge, untapped end market for computers, consumer and telecommunications products will produce a growing semiconductor manufacturing base for many years. Inhibitors The transition to lead-free and halogen-free "green" (environmentally friendly) packages could be slowed if reliability concerns and standards are not resolved. Continued weak economic conditions could result in reduced demand for portable, wireless and handheld devices. This would slow the transition to, and growth of, smaller chip scale packages (CSPs) and new SIPs, thereby reducing the growth rate of newer, finer-pitch-capable bonding equipment. The challenges of automating the handling of large, thin 300- millimeter (mm) wafers through the assembly process will not be resolved in a timely and cost-effective manner. Company consolidations may moderate overall capital spending for packaging and assembly. 7

8 8 1Q03 Scenarios: Semiconductor Capital and Equipment Spending Forecast Range Tables 4 through 6 provide quarterly and annual revenue, sequential, and year-over-year growth forecast scenarios for the packaging and assembly equipment market. Table 4 Worldwide Packaging and Assembly Equipment: Revenue Forecast Scenario (Billions of Dollars) Best Case Most Likely Case Worst Case Best Case Most Likely Case Worst Case Best Case Most Likely Case Worst Case Table 5 Worldwide Packaging and Assembly Equipment: Sequential Growth Forecast Scenario (Percent) Best Case Most Likely Case Worst Case Best Case Most Likely Case Worst Case Best Case Most Likely Case Worst Case

9 9 Table 6 Worldwide Packaging and Assembly Equipment: Year-Over-Year Growth Forecast Scenario (Percent) Best Case Most Likely Case Worst Case Best Case Most Likely Case Worst Case Best Case Most Likely Case Worst Case Gartner Dataquest Perspective After ringing out a second dismal year for capital spending and equipment in 2002, we have guarded optimism for 2003, despite a high degree of uncertainty in the near-term macroeconomic picture. Our review of the supply fundamentals is what instills a certain level of optimism in our forecasts. During 2002, the supply-demand situation was getting under control, and leading-edge capacity was getting tight as companies watched spending closely. According to our estimates, the semiconductor industry will enter 2003 being significantly underinvested. In addition, ample unfinished projects are available, which will allow rapid moves on equipment once demand picks up. So, when we combine all these factors, we believe motivation and location will be sufficient to install new equipment in With fundamentals improving, life will return to the semiconductor equipment industry. Key Issue How will market conditions affect semiconductor manufacturing, procurement and cost models?

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