Chip gear industry's funk is a red flag

The chip equipment business is "on hold," said an analyst at a major industry association, and that bodes ill for the electronics industry in 2009.

Chip equipment makers signal how the electronics industry will fare in the future. They take orders from chipmakers which, in turn, take orders from electronic gadget makers.

Lara Chamness, a senior market analyst in industry research and statistics at Semiconductor Equipment and Materials International, talked about prospects for the industry in an interview. SEMI is an industry watchdog that covers the manufacturing supply chains for the microelectronic, display, and photovoltaic industries.

"We were hoping that 2009 would be the comeback year for semiconductor equipment. Now our outlook is much more cloudy," Chamness said.

On October 16, SEMI issued a report saying that the book-to-bill ratio for North American semiconductor equipment manufacturers slipped to 0.76 in September, the lowest ratio since November 2001. A lower ratio indicates lower orders.

While Chamness said the economic crisis is affecting everyone, the chip equipment industry is facing a double whammy of downturn and glut. Above and beyond the financial crisis, the overcapacity in memory has been affecting the bottom line of just about every major chipmaker, including Intel, SanDisk, Samsung, Taiwan Semiconductor Manufacturing Co., and Micron Technology.

"Things have been really difficult for the memory guys in the last few years...They're focusing on cleaning up their own operations and not expanding," Chamness said.

Then there is the worldwide financial problem on top of this. "Capital markets are freezing. So that's directly impacting capital equipment. It's indicative of what's happening in the worldwide economy," she said. "The addition of fab capacity is on hold right now. People are being very conservative with their money."

She cited TSMC, the largest contract chipmaker in the world, as an example of a company where factory utilization rates are low. "TSMC has announced a pretty significant drop-off as far as utilization goes."

Lam Research said chip plant utilization rates are at low levels.

(Credit: Lam Research)

Lam Research, a major chip equipment supplier, said its outlook is darkening too. "Our customers are facing an environment of reduced IC (integrated circuit) unit demand combined with already-existing excess capacity," said Steve Newberry, Lam's president and chief executive officer, speaking during the company's earnings conference call earlier this week.

"The unprecedented events in the world's financial markets have severely restricted access to investment capital not only for our customers but many of their customers," he said. "Supply and demand imbalance in semiconductors, especially memory, appears to have worsened over the past few weeks."

SEMI's Chamness holds out hope for the U.S. government's stimulus package. "In a few months, if the (U.S. government's) stimulus package works maybe they'll feel more comfortable and they'll start reinvesting."

Intel, she said, is one of the few investment standouts. "Intel is actually investing right now. They traditionally invest when times are hard." (It should be noted, however, that Intel--as part its joint manufacturing venture with Micron Technology--has scaled back its manufacturing capacity for flash memory.)