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Profitability of semiconductor manufacturers increased to 21.4% in the fourth quarter of 2009, the highest level since the fourth quarter of 2000 when it reached 24.7%, according to new data from iSuppli Corp. Although the rebound is partly due to the recovery in the market, the market research firm believes that the improved profitability is also a condition of reduced capital expenditures and other cost management strategies.

“Chipmakers in 2009 reacted quickly and aggressively to meet the downturn by cutting costs and improving cash flow,” said Derek Lidow, president and chief executive officer of iSuppli. “And as the market began to turn back up, the industry showed great restraint against adding production in order to avoid any overcapacity situations. This allowed the companies to recapture their pricing power to boost profitability.”  

According to iSuppli, global spending on semiconductor manufacturing equipment is expected to rise in 2009 after three consecutive years of decline but will remain at historically low levels, at less than half of what they were in 2007 and 2008.

The current spending is directed at advanced packaging to support new types of products, rather than at investments in expansion of overall wafer fabrication capacity.

“The semiconductor industry has almost completely eschewed the broad-line model that once was the hallmark of the largest players in the business,” Lidow said. “Instead, chipmakers now are concentrating on specific market segments, allowing them to focus on areas where they have pricing power and a competitive advantage. This has allowed them to improve profit margins and to cut overhead.”