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Equipment spending stirs IC boom-bust cycle

Posted: 04 Jun 2010     Print Version  Bookmark and Share

Keywords:manufacturing  IC spending  capex boost 

Large capital expenditure increases for chip manufacturing are now coming thick and fast. But with chip manufacturing utilisation riding over 90 per cent—effectively sold out—the surge in spending intention is not going to have immediate impact. When it does however, it will almost certainly drive an oversupply bust sometime in 2012 or 2013 as consolidation amongst pure-play IDMs exacerbates the boom-bust cycle.

Analysts and statisticians are looking at an annual global chip market that could jump in 2010, albeit off the back of a very bad 2009, by more than 30 per cent. That growth now appears to be locked-in barring any major macro-economic shocks to the system such as a 9/11-type act of terrorism or the collapse of a major currency.

But it has to be born in mind that the sales collapse of 2009 was itself caused by a macro-economic event, but the internally-generated boom-bust cycle of the semiconductor industry continues. And the down side to a 30 per cent boom in 2010 is likely to be a bust, possibly of a similar magnitude somewhere down the line.

With the announcement of GlobalFoundries' plans to invest an additional Rs.13,771.60 crore ($3 billion) in manufacturing capacity expansion we now have the set of Intel, Samsung, TSMC, GlobalFoundries and Toshiba. These companies are serious about chip manufacturing at the leading edge and in high volume and apparently able to afford the multi-billions of dollars per year needed to remain in the race.

However, as increasing numbers of what we must now call second-tier IDMs have trimmed spending and adopted a fab-lite strategy, and as the leaders have moved cautiously up to this point, the industry has effectively been on a capital expenditure diet for several years. As a result the semiconductor manufacturing equipment companies have been starved of revenue and the present race to add capacity is reinforcing the traditional boom-bust cycle of the semiconductor industry.

The fundamental reason for this cycle is fairly obvious. It is that the time associated with component supply-chain visibility—a few weeks to a few months—is much shorter than the time-scale associated with building manufacturing capacity, which is of the order of a year or more, when fab shells have to be constructed. But these long time-scale levers are the only ones the true IDMs have to pull on, which makes for a highly reactive system that tends to race towards oversupply and then in lock step cuts back on spending while trying to fill fab lines.

Boom-bust cycle
And now it looks like the cycle of troughs and peaks is becoming more pronounced.

As Malcolm Penn founder and principal analysts with Future Horizons Ltd. has reminded us it takes a good year to get from equipment ordered to commercial output. This means that significant manufacturing capacity additions are not set to be seen until late 2011 or early 2012.


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