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Splinter asks: “So, how bad is it?”

16 February 2009 | By Mark Osborne | Editor's Blog

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There is little doubt that the current downturn is expected to be the worst the semiconductor industry has ever experienced - including that of 2001.

Having been there before, like many, we know that this is not something to be taken lightly. So far, the whole industry food chain is reacting very quickly (compared to 2001) in cutting operating costs to preserve cash, hoping such actions will be sufficient to ride out the current crisis.

As has been rightly pointed out, this latest ‘worst downturn in the history of the semiconductor industry,’ is very different from the last, which means it would be a mistake to draw comparisons or operate businesses based on history.

Indeed, that would seem to be the thinking of Applied Materials head honcho, Mike Splinter, who opened last week's quarterly conference call with a question, rather than any attempt at a history lesson.

Splinter ask a good question: "So, how bad is it?"

I didn’t get the impression he was asking that question because he didn’t know the answer, rather it was the opening for him to set the scene, give some scale and attempt to lay the ground for managing analysts' expectations over possibly the next two years.

Splinter set the scene with the following bullet point:

• The majority of IC manufacturers are making losses that are currently increasing.
• Fab utilization is at historic lows for both memory and foundry manufacturers that range from 70% to 30% respectively.
• An increasing number of fabs have closed permanently and others shuttered.
• Overall fab output cut by approximately 25%.
• Approximately 10% of memory capacity permanently removed (more to come IMHO).
• Leading-edge capital spending way below the norm in a downturn. ‘Modest or restricted,’ Splinter said.
• Wafer Front-End (WFE) capital spending to fall approximately 50% in 2009. In the range of US$10 billion (inline with market analysts) to US$12 billion (too optimistic, I would say, even though he noted demand uptick required to hit the higher number).
• Semiconductor customers said that the fall-off in chip demand and pricing is the most severe they have ever experienced.
• This is the lowest level of investment in more than 15 years.

Splinter summarized with the following comment:

“We are planning for a prolonged period of weakness. Clearly the wafer fab equipment industry will be changed as a result…However these are still the early days in this crisis and it is premature to speculate how fundamental the structural changes will be and how our customers adapt. There is much we will still learn over the next year.”

I think Splinter is right to paint the above picture of the industry to analysts and investors as I don’t see a real capital spending recovery for several years after 2009. Stimulus packages aside, the industry needs to sort out over-capacity and go through the much-needed consolidation before the industry can really move forward.

Some of that consolidation throughout the food chain will come from bankruptcies rather than true consolidation as the cash preservation and tight credit markets will make it hard for large-scale M&A.

With WFE spending set on ‘lean’ for 09 and only a few companies really spending (Intel, Samsung, Toshiba-ish), equipment companies will be hit very hard.

Although not the end of the world, this is the new ‘worst downturn in the history of the semiconductor industry,’ and that’s not the media making the claim, rather the executives going through it.

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