1Q04 Update: Silicon Demand Will Move to a Full Recovery

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1 Gartner Dataquest Alert 1Q04 Update: Silicon Demand Will Move to a Full Recovery Our latest silicon demand forecast indicates that wafer demand in 2003 will increase 9 percent over While the forecast growth remains more or less unchanged from the previous outlook in the fourth quarter of 2003, silicon wafer demand shows signs of a sustainable recovery into 2004 with a solid recovery of semiconductor device demand. Gartner Dataquest anticipates that demand, as measured in millions of square inches (MSI), will show 15 percent growth in 2004 over 2003 and will enter an expansion phase in the second half of the year, driven by a ramp-up of 300-mm wafer demand. 9 Percent MSI Demand Growth Expected in 2003 Total device shipments in the third quarter (on a value basis) registered 10 percent growth over the preceding quarter, and momentum is expected to continue in the fourth quarter. Wafer demand, on the other hand, grew moderately at 3 percent in the third quarter, and the pace will not likely pick up much in the fourth quarter. In 2004, however, the wafer market will benefit from the steady growth of device demand. This is reflected in Gartner Dataquest's field surveys of the wafer industry. While demand has been driven by 200-mm and 300-mm segments up to the third quarter, bookings of smaller wafers for discrete and other devices are up in the fourth quarter, showing signs of across-the-board recovery. The recovery scenarios for device demand have not changed much from those reported previously. In addition to the already strong demand for communication applications, especially portable phones, growing demand from the PC market will raise the entire wafer market. Then, the improvement of macroeconomic conditions will stimulate electronic equipment demand, resulting in a visible recovery of device demand in almost all the segments. Gartner Dataquest released "4Q03 Update: Global Semiconductor Forecast Scenarios" (SEMC-WW- DP-0351) in December, which indicates that the world semiconductor market will record 10 percent growth in the third quarter. Although growth will slow down to about 3 percent in the fourth quarter, the market will register an annual growth rate of 12 percent, totaling $174 million. Based on the device demand growth scenarios, wafer demand will grow between 2 percent and 3 percent sequentially from the third to the fourth quarter. On an annualized basis, it will grow 9 percent and reach 5,216 MSI (under the most likely case). Normally, wafer demand in the first quarter is seasonally inactive, but the first quarter of 2004 will see higher growth than usual at about 2 percent thanks to the recovery of device demand. In the second quarter, wafer demand will enter a full recovery phase to follow device demand that benefits from electronics markets including back-to-school sales, the holiday shopping season and the long-awaited recovery of 22 December Gartner, Inc. 1

2 corporate IT investment. Wafer demand will grow between 5 percent and 7 percent in the second quarter, and the recovery trend will continue with steady growth into the second half of Figure 1 shows growth scenarios for wafer demand in 2003 and In 2003, there is little difference among the scenarios: Annual demand will register 8 percent to 10 percent growth. In 2004, the best case assumes that macroeconomic conditions will revive earlier than expected, stimulating corporate IT investment. Under the scenario, wafer demand will be driven by firm device unit demand, and MSI demand will record 5 percent to 6 percent growth in the first quarter, with a further acceleration to 10 percent in the second quarter. As a result, the annual growth rate in 2004 will reach 22 percent over In contrast, the worst case scenario assumes that device demand will struggle to recover, decline in the first half of 2004, and end with single-digit growth on an annualized basis. This will suppress wafer demand, which will grow 7 percent in Figure 1 Quarterly Silicon Demand Profile by Scenarios Millions of Square Inches 1,800 1,600 1,400 Most Likely Case Best Case Worst Case 1,200 1, Q01 2Q01 3Q01 4Q01 1Q02 2Q02 3Q02 4Q02 1Q03 2Q03 3Q03 4Q03 1Q04 2Q04 3Q04 4Q Source: Gartner Dataquest (December 2003) 22 December Gartner, Inc. 2

3 300-mm Wafer Demand Will Ramp Up in 2004 and 2005 According to Gartner Dataquest's scenario for an upcycle in 2004 and 2005, wafer demand will show double-digit growth even in A ramp-up of 300-mm wafer demand will drive the growth. We estimate the average fab utilization rate at 88 percent in the fourth quarter of It will further rise to over 90 percent in In particular, leading-edge fabs appear to be operating above 90 percent at present and will contribute greatly to the anticipated growth of wafer demand. Given the upward trend, 300-mm wafer demand is expected to ramp up in 2004 and In fact, it is growing steadily at present. We estimate that in the third quarter of 2003, 300-mm demand was 350,000 to 370,000 wafers per month. It will further grow to 400,000 in the fourth quarter. According to Gartner Dataquest's fab database, 10 projects to construct 300-mm fabs will start in 2004, in addition to expansion of existing fab capacities, and will augment demand significantly in 2004 and Total demand will reach 600,000 wafers per month at the end of 2004 and exceed 1 million at the end of 2005 (including use for testing and monitoring). Then, in the first half of 2005, wafer demand will continue to receive impetus from robust device demand and new fabs coming on stream. In the second half, as device demand subsides and the fab operating rate hits its peak, the wafer market will lose momentum accordingly. Nevertheless, firm device demand in the first half of the year and the startup of 300-mm fabs will result in 13 percent growth for the year. However, if the demand-side downcycle in electronics equipment emerges and greatly impacts semiconductor unit demand, silicon demand will not be immune, and the silicon market will show a shipment adjustment. In late 2005 or early 2006, the semiconductor market will enter a supply-side downcycle, and most fabs will operate increasingly below capacity, putting a brake on wafer demand. As a result, annual wafer demand will remain more or less unchanged from the previous year. In 2007, while demand still stagnates, some leading-edge fabs especially 300 mm will step up production, and annual wafer demand is expected to record moderate growth of around 5 percent over the preceding year. Finally, in 2008, an expected recovery of device demand will lead to the improvement of the fab utilization rate and a comeback of wafer demand. As leading-edge devices are expected to be fabricated mainly at 300-mm wafer fabs, 300-mm wafer demand will enjoy accelerated growth. As a result, annual wafer demand will resume double-digit growth (around 12 percent). Figure 2 summarizes our wafer demand forecast up to Gartner Dataquest expects a compound annual growth rate (CAGR) of 9 percent from 2002 through 2008, with total demand reaching 8,057 MSI in December Gartner, Inc. 3

4 Figure 2 Silicon Wafer Demand Forecast, Millions of Square Inches 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1, Source: Gartner Dataquest (December 2003) Gartner Dataquest Perspective The recovery of device demand accompanies similar signs for wafer demand, which appears to be moving toward a full-fledged recovery and a new expansion phase. Nevertheless, it is too early to tell whether wafer vendors will now benefit from a favorable business environment. The market continues to feel significant price pressure, which looms over a market outlook on a value basis. In fact, despite the fact that 300-mm wafers with a price premium (higher unit price per area) are gaining share steadily, the value-based wafer market size in 2003 will expand by only 10 percent over the previous year. This is largely because the 200-mm segment the mainstay of wafer demand faced a continued decline in average selling price, which offset unit demand growth. Furthermore, the 300-mm segment has experienced rapid price declines since its startup, and at least a 10 percent decrease is expected in the next few years. The situation has prompted the industry to announce consolidation and cutback plans, including Wacker Siltronic's closure of a 200-mm wafer plant in Malaysia and rationalization of a 200-mm plant in Germany, and SUMCO's rationalization of its Oregon plant. Traditionally, the upward silicon cycle allowed the wafer industry to be prepared for the subsequent round of investment. The present cycle, however, forces the industry to adjust itself to a new paradigm by continuing restructuring efforts in the wake of market expansion. 22 December Gartner, Inc. 4

5 What motivates wafer vendors to make such incessant restructuring efforts? They are driven by the capital requirements for 300-mm wafer capacity. In general, construction of a 300-mm wafer plant with capacity for 100,000 wafers per month is estimated to cost between $550 million and $640 million. Data on past investment projects shows that the industry has diverted about 27 percent of sales to capital spending during the upward cycle. Assuming that the percentage is an upper limit for the industry, a yearly capital expenditure between $550 million and $640 million requires annual revenue over $2 billion. Only two or three vendors have potential to pay the expenditure through sales for a few years. For a smaller vendor that cannot meet the requirement, a merger, acquisition or other major change may be required to enter the 300-mm wafer business. The next upward cycle may trigger major changes in the industry's landscape and its players. By Takashi Ogawa 22 December Gartner, Inc. 5

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