Intel Ups Capital Expenditures

Electronic News, Jan 22, 2001 by Gale Morrison

But new budget is still below 2000 run-rate, and new technologies will require even more bucks

RESEARCH TRIANGLE PARK, N.C. -- Some bank analysts and members of the press might have been pumped up by Intel Corp.'s statements last week that the chip giant was boosting its capital expenditure budget; the capital equipment stock sector certainly was. But a reading between the lines shows that the $7.5 billion the Santa Clara, Calif-based company plans to spend isn't the panacea it might seem.

Andy Bryant, chief financial officer of Intel (nasdaq: INTC), told analysts of the increase during the company's fourth-quarter earnings call (see story, page 1). Due to the cost of migrating its processes to 0.13-micron design rules and 300mm-wafer sizes, the company would be spending $7.5 billion in 2001, more than the $6.7 billion it had originally forecast for this year, Bryant said.

Bryant told Wall Street that Intel founder and industry patriarch Gordon Moore believed that investing in fab capacity was the best way to win back customers when industry downturns recur. Moore also laid the foundation for Intel's "copy exact" policy when it comes to equipping fabs, which decrees that, once company manufacturing engineers have perfected a process-tool and materials set, all Intel fabs worldwide are to use the same "recipes." This has always meant that Intel spends big to win big when it comes to fab equipment.

Following last week's statement, several bank analysts issued related reports and the stock market reacted accordingly, pushing the sector up from the lows reached in recent weeks after many observers predicted a major slowdown. Only the Morgan Stanley Dean Witter (MSDW) semiconductor equipment equity research team didn't cheer Intel's statement. MSDW, SanFrancisco, pointed out that Intel was on par with its $2.5 billion capital expenditures in the fourth quarter of 2000 to spend $10 billion for the year, so any forecast for $7.5 billion this year bodes poorly for equipment makers. That's a 15 percent to25 percent decrease in spending, an MSDW report said. It concluded that last week's market move was a bear market rally.

Klaus Rinnen, chief equipment analyst at GartnerGroup Inc.'s Dataquest unit, San Jose, said he too couldn't find the silver lining that many banks and investors clearly saw.

"Our forecast is for (equipment revenue growth) of 8 percent, with a downside of 4 percent," Rinnen said. And the probability of a far worse downside is almost too ugly to think about.

"We estimate that the probability for the downside is more than 50 percent. I am cautious about Intel's spending and would think it might be adjusted as the year goes by... likely downward," he said. He and others are watching closely since the Taiwanese foundries Taiwan Semiconductor Manufacturing Co. and United Microelectronics Corp. have already cut their capital expenditure budgets by 15 percent, and as Motorola Inc. cuts spending across the board.

Observers are noting that if Intel and these others have any intention of producing 0.13-micron devices on 300mm wafers during 2001, the cost of the equipment and materials for this new manufacturing node is at least what they plan to spend, if not much more. The node also includes copper interconnects.

Average selling prices (ASPs) for these new tools are at least 25 percent higher than analogous previous-generation systems. And even at that level, Applied Materials, Novellus, Silicon Valley Group, ASM Lithography, KLATencor, and the host of others won't come close to getting a profitable return on their multi billion dollar R&D investments in fielding the new technologies.

Rinnen notes that these higher ASPs--for copper, for 300mm, for lithography with the newest and most sophisticated lasers, optics and photomasks ever produced -- are hitting manufacturers all at once. Unfortunately, this sets equipment makers up for even greater pricing and profit pressure. Hang on to your hats.