2002: no real recovery just yet; utilization rates improve, device building up, but still much to be done before recovery - Special Section: Wafer Processing - semiconductor industry report

Electronic News, July 22, 2002 by Lee Cook

From a device manufacturer's perspective, there is a broad consensus that the bottom of the 2001 semiconductor recession occurred early in Q4.

Over the first six months of 2002, a steady improvement has been seen in fab capacity utilization and net device output.

There has also been significant recovery m demand for chemical mechanical planarization (CMP) consumables.

However, there is evidence that shows what the industry is seeing is not a broad market recovery in the classical sense.

Instead, it appears to be the result of a combination of inventory readjustments, the implementation of 0.13-micron process technology and a global restructuring of the semiconductor balance of power.

This is likely a prelude to a more sustainable demand-driven recovery that will begin in 2003.

When considering the timing of a recovery, one must first consider what precipitated the 2001 recession.

All evidence points to a lack of growth in fundamental demand as the key factor.

Overly optimistic projections of demand occurred in most market segments for a variety of reasons, including, as we now see, a deeply flawed model for telecom and Internet services.

The real situation was that the end-user telecom market was saturated, and PC demand, historically the mainstay of semiconductors, was driven by consumer purchases.

Business computing demand had never recovered from the pre-Y2K spending binge.

In 2002, no strong resurgence in demand is visible. Consumer digital electronics and automotive electronics markets continued to remain strong through Q1 2002, but consumer confidence has slipped markedly in recent months.

The spate of corporate financial scandals and the associated swoon of the stock markets have cut further into consumer confidence and discretionary incomes, offsetting effects of a modest economic recovery.

One result is that automobile and computer purchases by consumers have slipped markedly in the last few months.

Corporate capital budgets remain tight in 2002 with no resurgence visible in business computing purchases.

In telecom, neither handset demand nor networking systems have shown visible signs of recovery.

Why Up?

So if fundamental demand isn't growing, why is fab utilization up? Five factors appear to be driving the increase:

* An overestimation of demand recovery by chipset and motherboard manufacturers, primarily in Q1

* An acceleration of device outsourcing to foundries, especially by traditional IDMs hard hit by the recession

* Accelerated output of DRAM in the face of looming industry consolidation

* The ramp of 0.13-micron process technologies at many leading manufacturers

* The ramp of 300mm wafer production lines, tied closely with the preceding factors

Demand for semiconductor process consumables and equipment is driven by capacity utilization, capital investment and process yields.

For consumables, which are a leading indicator of market recovery, demand expansion in 2002 follows the demographics of 300mm fabs and advanced process technologies, which are strong in Taiwan and some segments of North America, modest in Europe and weak in Japan.

For the remainder of 2002, the growth in demand for consumables related to advanced processes is expected to continue.

However, once the current process ramps are complete and yields have stabilized, the total demand will likely soften as fab engineers shift focus to improving manufacturing process costs.

The 2002 demand for equipment, a lagging indicator of market recovery, still isn't robust.

Capital Budgets Must Increase

Improvement is not expected until significant increases occur in capital budgets.

Given all of the above, there is likely a broader sustainable recovery in 2003, assuming no reversals in current economic progress and no catastrophic world events.

Both equipment and materials suppliers will benefit as older, uncompetitive capacity is taken out of production and new equipment and facilities are required to lower die costs and deliver leading edge performance.

End-user demand, the most important element for an industry-wide recovery, should rise as the generation of computers that was purchased before Y2K reach their physical lifetime limits in 2003, leading to a significant upturn in business PC purchases.

In addition, a continued economic recovery will result in increased consumer confidence and spending as well as increased business capital outlays.

All of these factors indicate that the limited growth of 2002 will be replaced by a true market recovery some time in 2003.

Lee Cook is a sales and technology planning fellow for Rodel Inc.