Forecast Analysis 4Q03 Update: Semiconductor Capital and Equipment Spending Abstract: Industry fundamentals have strengthened, but a lack of business confidence is impacting capital equipment spending. Several scenarios are possible for the industry's recovery. By Klaus-Dieter Rinnen, Mark Stromberg and Jim Walker Strategic Forecast Statements The semiconductor wafer fab equipment (WFE) industry is realizing slow expansion in 2003 because of an ultraconservative investment stance; Gartner Dataquest expects the market to expand just over 1 percent over 2002. The semiconductor packaging and assembly equipment (PAE) industry is expanding strongly in 2003 based on improvements in device unit demand and new package implementation; our projection has increased from three months ago we now expect growth of 19.8 percent. Dominated by WFE sales, quarterly equipment revenue reflects a double-dip profile, with the new bottom for the downcycle in the second quarter of 2003. Despite weakness in the first half of 2003, the equipment market should realize a second-half acceleration as a calm geopolitical scene and the absence of wild cards allow end-user demand to build and to cascade down the electronic equipment supply chain. Gartner Dataquest continues to estimate wafer fab utilization for the third quarter at 86.5 percent, climbing further before year-end 2003, setting up for a strong 2004. Publication Date: 19 November 2003
2 4Q03 Update: Semiconductor Capital and Equipment Spending Forecast Overview This serves as a companion piece to Gartner Dataquest research issued in October 2003, in which we stated our opinion and outlook for the semiconductor manufacturing segments, wafer fab, and packaging and assembly; see "Positive Outlook for Semiconductor Capital Equipment," SEMC-WW-DA-0106. This piece expands on the best and worse case scenarios briefly referred to in the earlier work. The industry's fundamentals remain poised for growth. A new upcycle is here, which is clearer for the semiconductor industry than just three months ago. Consequently, Gartner Dataquest upgraded its semiconductor device market forecast from 8.3 percent to 11.2 percent. For details, see "2003 Semiconductor Revenue Forecast Inches Up to 11 Percent," SEMC-WW-DA-0104. As for manufacturing, utilization rates continued to improve in the quarter. However, all of these improvements were not enough to break the impact of an ultraconservative investment stance that is holding capital spending down in the immediate future, impacting semiconductor equipment vendors. Overall, we are revising capital equipment spending downward from our midyear forecast. Our latest forecast revision shows the outlook for capital equipment has declined from 11 percent to 3.4 percent growth. But a more detailed breakdown does show strong growth expectations for PAE sales, for which we forecast 19.8 percent growth. However, WFE sales are most affected. Here, the first quarter of 2003 was an upside surprise, but then the second quarter was poor. Quarterly revenue declined about 25 percent sequentially, making a new bottom in the quarterly picture. Our prior forecast assumed a second-quarter contraction, but the magnitude of the actual decline exceeded our expectations handsomely. On the positive side, order momentum has improved in recent months, allowing for our forecast second-half acceleration. This should keep this year in the plus column. Our WFE forecast estimates 1.1 percent growth, down from 8.7 percent growth for 2003. For 2004, improved end-user application demand, device sales and manufacturing utilization finally combine to drive strong equipment growth. This Gartner Dataquest research looks more closely at the upside and downside scenarios that we project for the next two years. 2003 Gartner, Inc. and/or its Affiliates. All Rights Reserved. 19 November 2003
3 Forecast Scenario Commentary General Given improvements in end-user demand and low semiconductor device inventories across the supply chain, semiconductor unit production is closing in on the prior peak during 2003. In fact, for the consecutive threemonth period ending 31 August, total integrated circuit (IC) unit sales were at 98.3 percent of the peak in 2000, according to World Semiconductor Trade Statistics (WSTS) data. We expect IC unit shipments during 2003 to exceed 2000 peak sales, and, of course, IC unit trends determine silicon usage requirements. Silicon demand is rising. Given a continuing conservative investment stance, these improvements have led to a tightening of semiconductor manufacturing capacity across the board. Already in 2003, PAE vendors are realizing sales growth based on these improvements. As for WFE, rather cautious and selective investment, with a few notable exceptions, should keep sales largely flat over last year. In fact, as noted, the WFE market segment realized over the past 12 months a second down leg and a new bottom in quarterly sales in the second quarter of the year. How will the industry proceed from here? In this section, Gartner Dataquest introduces its forecast scenarios for both WFE and PAE. For each forecast scenario, we have arrayed a set of assumptions that lead us to forecast independent sequential quarterly growth patterns. What is important to recognize, for example, is that the best-case scenario will not necessarily have the best sequential growth rate, and vice versa, the worst-case 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 refers to Staff Accounting Bulletin (SAB) 101 revenue. WFE Market Overall worldwide wafer fab utilization keeps on rising. Gartner Dataquest estimates that rates were at 86.5 percent in the third quarter of 2003. For leading-edge fabs, defined as 0.18 micron and below, utilization was about 93 percent. So, the industry has crossed the magical 85 percent mark, the historical trigger level for new investments, but there is a reluctance to buy, despite the current uptick in orders. Looking ahead, given continued reluctance in spending commitments, stretching equipment lead times and ramping demand, there is a chance of device shortages. Allocation is already being seen in some segments this year. The quarterly revenue picture for the WFE market reflects the great reluctance of the industry to spend. The first quarter of 2003 was an upside surprise. The second quarter of 2003 was poor, surprising on the downside. Quarterly revenue declined about 25 percent sequentially, making a new bottom in the quarterly picture. 2003 Gartner, Inc. and/or its Affiliates. All Rights Reserved. 19 November 2003
4 4Q03 Update: Semiconductor Capital and Equipment Spending On the positive side, bookings have finally bottomed and started to move upward, although slowly, during the second quarter. These order improvements re-validate our long-standing expectation of a second-half acceleration. And with them, WFE sales should stay in the plus column with 1.1 percent. Looking ahead, growth in 2004 will be very much dependent on when the industry will switch from ultraconservatism to ultraoptimism. And then can the equipment actually be delivered? Already the current, first uptick in bookings is leading to a stretching of some lead times. Will the industry and its suppliers be prepared to react when the switch is thrown? There won't be much warning. Changes Compared With Previous Forecast Gartner Dataquest provided its previous version of this forecast in July 2003; see "3Q03 Update: Semiconductor Capital and Equipment Spending," SEMC-WW-DP-0315. Changes to that forecast follow. Additional Drivers and Inhibitors The following drivers and inhibitors could affect the WFE forecast scenarios: Drivers As stated in our midyear release, uncertainty started to turn into certainty in the second quarter, and this trend continued in the third quarter. So, without disruptions by any wild card such as wars, terrorist attacks and epidemics the world economies could focus on all those issues that needed their attention to bring about a full economic recovery. We do not anticipate seeing much improvement this year, with the exception of the United States, but 2004 should bring the return to a more typical gross domestic product (GDP) growth level. This should provide fertile ground for electronic equipment segments that suffer from saturation, especially PCs. Since the conclusion of major combat in Iraq, IT spending sentiment has been on the rise for 2003 and even more so for 2004. This opens up the prospects of a year-end 2003 budget flush and improved spending in 2004. A PC recovery based on a renewed replacement cycle in the corporate environment is essential for any major improvements in semiconductor demand. Sales in the first half of 2003 have exceeded expectations, and the outlook remains robust. Consequently, our PC unit forecast has been revised upward to 8.3 percent. At this stage, we expect a replacement cycle is coming, but significant concern continues over its magnitude and duration. Quarterly semiconductor sales revenue has been exceeding our expectation in the first half of this year, leading to an upward revision of our chip forecast to 11.2 percent. The third quarter appears to have been another upside surprise, likely allowing 2003 sales growth to outpace our upgrade expectation. 2003 Gartner, Inc. and/or its Affiliates. All Rights Reserved. 19 November 2003
For a second consecutive quarter, the device inventory situation remains under control and tight. A good "bill of health" in inventories means that renewed electronic equipment demand will have to be satisfied through new production. Capacity utilization keeps improving. We estimate overall utilization was 86.5 percent in the third quarter. With it, the industry crossed the magical 85 percent mark, the historical trigger for new spending. While order momentum has picked up during the second quarter, order and sales levels are below what we would deem normal. How long will it stay like this? The return of business confidence, improving profits and increasing risk of opportunity loss will be key factors. Equipment demand could jump. Already the second- and third-quarter uptick in orders is stretching out lead times. The improving, but still slow, order momentum and longer lead times open the possibility of device shortages. After staggering losses in the downcycle, will the industry also lose during the upswing because it cannot deliver? We forecast a contraction in foundry spending for 2003. Despite improving utilization rates, there have been no capital spending revisions by major foundry players. Does this represent the calm before the storm? Inhibitors Doubts of sustainability in the demand picture and a lack of business confidence in an upcycle has largely kept companies from investing. The situation is improving; wounds are healing. Any jolt related to wild cards or unrealistic expectations about the speed of recovery could provide a setback for the fragile "emotional" fabric of the industry. Corporate spenders remain cautious which sounds like a broken record but is still true. Although results from a new Gartner Dataquest IT spending survey indicate that while sentiment remains cautious, it has improved since the end of major combat in Iraq. In fact, the improvement in sentiment opens up the prospect of a budget flush at the end of the year. Will it occur or will there be further postponement into next year? Increasing dynamic RAM (DRAM) investments could perpetuate an overcapacity situation in this segment, especially if the PC market does not live up to 2004 expectations. In an effort to regain and bolster earnings potential, equipment makers have trimmed their excess through additional workforce and capacity reductions. Can they properly react to a sudden surge in demand?wehavedoubts. A recent uptick in orders is stretching lead times already. Can equipment suppliers rein them back in? 5 2003 Gartner, Inc. and/or its Affiliates. All Rights Reserved. 19 November 2003
6 4Q03 Update: Semiconductor Capital and Equipment Spending Forecast Range Tables 1 through 3 provide quarterly and annual revenue, sequential, and year-over-year growth forecast scenarios for the WFE market. Table 1 Worldwide WFE: Revenue Forecast Scenario (Billions of Dollars) 1Q02 2Q02 3Q02 4Q02 2002 Best Case - - - - - Most Likely Case 3.45 3.88 4.57 4.30 16.20 Worst Case - - - - - 1Q03 2Q03 3Q03 4Q03 2003 Best Case - - 4.05 4.86 16.70 Most Likely Case 4.40 3.39 3.93 4.66 16.37 Worst Case - - 3.71 4.14 15.64 1Q04 2Q04 3Q04 4Q04 2004 Best Case 5.35 5.77 6.14 6.77 24.03 Most Likely Case 4.99 4.87 5.14 5.77 20.76 Worst Case 4.28 4.11 4.27 4.82 17.48 Source: Gartner Dataquest (October 2003) Table 2 Worldwide WFE: Sequential Growth Forecast Scenario (Percent) 1Q02 2Q02 3Q02 4Q02 2002 Best Case - - - - - Most Likely Case -6.6-12.7 17.7-5.8-31.5 Worst Case - - - - - 1Q03 2Q03 3Q03 4Q03 2003 Best Case - - 19.5 20.0 3.0 Most Likely Case 2.3-23.1 15.9 18.6 1.1 Worst Case - - 9.6 11.5-3.5 1Q04 2Q04 3Q04 4Q04 2004 Best Case 10.2 7.8 6.4 10.2 43.9 Most Likely Case 7.1-2.4 5.6 12.2 26.8 Worst Case 3.4-3.9 3.7 12.9 11.7 Source: Gartner Dataquest (October 2003) 2003 Gartner, Inc. and/or its Affiliates. All Rights Reserved. 19 November 2003
7 Table 3 Worldwide WFE: Year-Over-Year Growth Forecast Scenario (Percent) 1Q02 2Q02 3Q02 4Q02 2002 Best Case - - - - - Most Likely Case -61.3-36.7-7.3 16.5-31.5 Worst Case - - - - - 1Q03 2Q03 3Q03 4Q03 2003 Best Case - - -11.4 12.9 3.0 Most Likely Case 27.7-12.8-14.1 8.2 1.1 Worst Case - - -18.8-3.8-3.5 1Q04 2Q04 3Q04 4Q04 2004 Best Case 21.6 70.4 51.7 39.3 43.9 Most Likely Case 13.3 43.7 30.9 23.9 26.8 Worst Case -2.8 21.4 14.9 16.3 11.7 Source: Gartner Dataquest (October 2003) PAE Forecast Scenario The worldwide utilization rate for packaging and assembly operations has moved above 80 percent. Many advanced packaging lines are running at over 90 percent capacity. This has resulted in continued strength in advanced packaging tooling and positive, but more moderate, growth in traditional packaging equipment. Traditional package families, such as the quad flat package (QFP) and small outline integrated circuit (SOIC), still make up the lion's share of total packages produced. Leadless lead-frame package production is ramping aggressively at near-maximum capacity. The quarterly PAE revenue picture reflects the pause that occurred in the second quarter. Though not as severe as the WFE decline, it will likely keep the equipment market from reaching beyond a 20 percent increase over 2002. PAE revenue has improved throughout the third quarter, helping to fuel additional growth for 2003. Bookings have strengthened in recent months, creating good momentum as we approach the end of 2003. This should enable the PAE market to expand by well over 30 percent in 2004. Changes Compared With Previous Forecast In July 2003, Gartner Dataquest provided its previous version of this forecast; see "3Q03 Update: Semiconductor Capital and Equipment Spending," SEMC-WW-DP-0315. Since then, Gartner Dataquest has reviseditspaeforecastasnotedhere. 2003 Gartner, Inc. and/or its Affiliates. All Rights Reserved. 19 November 2003
8 4Q03 Update: Semiconductor Capital and Equipment Spending For the PAE segment, we have lowered our forecast for 2003 to 19.8 percent growth, down from our July update of 26.5 percent. This adjustment was made because the second quarter was softer than previously anticipated. Thus, a correction is necessary. However, additional sales in the third quarter have returned, thus moderating the decline. Additional Drivers and Inhibitors The following drivers and inhibitors could affect the packaging and assembly forecast scenarios: Drivers Capacity utilization rates were over 80 percent in the third quarter of 2003 and will approach 85 percent by year-end. Leading-edge capacity continues to run above the 90 percent level. Flip-chip technology for graphics, advanced microprocessors and application-specific standard products (ASSPs) will grow to meet the faster speed demanded by consumer, telecommunications and automotive market increases for the remainder of 2003. The drive for continued cost reductions in radio frequency (RF) packaging for wireless products will prompt companies to follow through on capital spending commitments for system in a package (SIP) and fine-pitch bonding and other advanced tooling. DRAM memory will continue to gain momentum in its transition from dual in-line memory modules (DIMMs) to SIP and 3-D stacking to meet the higher speed required by the double data rate (DDR) architecture and the desire for greater density in portable products. Leadless lead-frame-based chip-carrier-style packages, such as quad flat, no lead (QFN) and small outline, no lead (SON), grew throughout the first half of 2003 and will see increased demand as replacements for SOIC and small outline transistor (SOT) packages. These package types will grow beyond 1.5 billion units by the end of the year. Integrated device manufacturers (IDMs) and original equipment manufacturers (OEMs) are again outsourcing more of their requirements, especially in the more-advanced, newer-style chip scale packages (CSPs), stacked chips (3-D) and SIP. IDMs and semiconductor assembly and test services (SATS) companies have continued their transition to China as a manufacturing hub throughout 2003. This trend will continue at a faster pace in 2004 as demand increases. Inhibitors Most SATS companies are offering lead-free and halogen-free "green" packages. However, reliability concerns and the lack of standard consensus of termination finishes can slow implementation on a universal basis. Newer, related issues pertain to flip-chip solder bumps inside the package and whether they should be lead-free. 2003 Gartner, Inc. and/or its Affiliates. All Rights Reserved. 19 November 2003
Economic uncertainties resulting from a prolonged engagement in Iraq and other security issues could forestall the recent recovery of the industry. This could lead to reduced demand for semiconductor products, resulting in a slower growth for packaging services and related assembly equipment. As the demand for thinner and thinner packages grows because of 3- D stacking and SIP, and as more 300-millimeter wafers come on line, the handling of these large, thin wafers through the assembly process may result in higher-yield loss. This may result in slower adoption of stacked die-based packages. Company mergers, acquisitions and consolidations generally occur during an upswing in a business cycle. As the recovery returns, these actions may moderate overall capital spending for packaging and assembly. If unit growth slows because of decreased demand, purchases of PAE will correspondingly be reduced as capacity utilization decreases. The transition to flip chip could be slowed if the cost of substrate technologies remains high. Tables 4 through 6 provide quarterly and annual revenue, sequential, and year-over-year growth forecast scenarios for the PAE market. Table 4 Worldwide PAE: Revenue Forecast Scenario (Billions of Dollars) 1Q02 2Q02 3Q02 4Q02 2002 Best Case - - - - - Most Likely Case 0.46 0.58 0.71 0.60 2.34 Worst Case - - - - - 9 1Q03 2Q03 3Q03 4Q03 2003 Best Case - - 0.77 0.78 2.91 Most Likely Case 0.71 0.66 0.73 0.71 2.81 Worst Case - - 0.71 0.66 2.74 1Q04 2Q04 3Q04 4Q04 2004 Best Case 0.94 0.99 1.12 1.10 4.15 Most Likely Case 0.86 0.90 1.01 1.00 3.77 Worst Case 0.77 0.80 0.90 0.89 3.37 Source: Gartner Dataquest (October 2003) 2003 Gartner, Inc. and/or its Affiliates. All Rights Reserved. 19 November 2003
10 4Q03 Update: Semiconductor Capital and Equipment Spending Table 5 Worldwide PAE: Sequential Growth Forecast Scenario (Percent) 1Q02 2Q02 3Q02 4Q02 2002 Best Case - - - - - Most Likely Case 12.0 27.0 23.0-16.0-21.7 Worst Case - - - - - 1Q03 2Q03 3Q03 4Q03 2003 Best Case - - 16.0 1.0 24.3 Most Likely Case 18.0-6.1 10.4-3.0 19.8 Worst Case - - 7.0-6.7 16.8 1Q04 2Q04 3Q04 4Q04 2004 Best Case 21.1 5.1 13.1-1.3 42.4 Most Likely Case 21.1 4.5 12.6-1.0 34.2 Worst Case 16.7 3.6 13.0-1.0 23.1 Source: Gartner Dataquest (October 2003) Table 6 Worldwide PAE: Year-Over-Year Growth Forecast Scenario (Percent) 1Q02 2Q02 3Q02 4Q02 2002 Best Case - - - - - Most Likely Case -66.2-19.1 36.4 47.0-21.7 Worst Case - - - - - 1Q03 2Q03 3Q03 4Q03 2003 Best Case - - 8.0 29.8 24.3 Most Likely Case 54.9 14.5 2.8 18.7 19.8 Worst Case - - -0.4 10.6 16.8 1Q04 2Q04 3Q04 4Q04 2004 Best Case 33.2 49.1 45.4 42.1 42.4 Most Likely Case 21.8 35.5 38.2 41.1 34.2 Worst Case 9.4 20.7 27.5 35.3 23.1 Source: Gartner Dataquest (October 2003) Gartner Dataquest Perspective Over the past months, the outlook for the semiconductor industry has improved further. But ultraconservatism is holding back spending on new equipment at least for the wafer fab. So, while PAE is enjoying its first year of solid growth, spending is still slow for WFE. WFE is finally picking up some steam in the second half of the year, but it is more of a deliberate investment increase than an industrywide surge. How long will the conservative investment pattern last? 2003 Gartner, Inc. and/or its Affiliates. All Rights Reserved. 19 November 2003
Clearly an emotional hangover from the downcycle is slowing spending, and profits have to accumulate. As capacity tightens more over the coming months, it will be a walk on the tightrope for the industry, which is trying to add capacity in measured balance to demand improvements while not spoiling prices or losing any sales opportunity. Overall, 2004 will be significantly better for all levels of the semiconductor industry supply chain. Strong growth will return, at last, next year. For further details on the semiconductor equipment market, see "Semiconductor Equipment Forecast, 4Q03 Update," SCEM-WW-MS-0174. 11 Key Issue How will market conditions affect semiconductor manufacturing, procurement and cost models? 2003 Gartner, Inc. and/or its Affiliates. All Rights Reserved. 19 November 2003
12 4Q03 Update: Semiconductor Capital and Equipment Spending This document has been published to the following Marketplace codes: SEMC-WW-DP-0350 For More Information... In North America and Latin America: +1-203-316-1111 In Europe, the Middle East and Africa: +44-1784-268819 In Asia/Pacific: +61-7-3405-2582 In Japan: +81-3-3481-3670 Worldwide via gartner.com: www.gartner.com Entire contents 2003 Gartner, Inc. and/or its Affiliates. All rights reserved. Reproduction of this publication in any form without prior written permission is forbidden. The information contained herein has been obtained from sources believed to be reliable. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of such information. Gartner shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof. The reader assumes sole responsibility for the selection of these materials to achieve its intended results. The opinions expressed herein are subject to change without notice. 118423