As chip equipment goes, so goes the electronics industry and the rest of high tech.
It's a pretty simple equation. Electronics gadget makers get silicon from chipmakers, which get production gear from companies like Applied Materials and ASML. So when chip gear suppliers go south, you can bet the entire electronics industry (and the overall tech industry) is in a funk.
And it is. Appearing on CNBC Thursday morning, Peter Wennink, chief financial officer of Netherlands-based chip equipment maker ASML, said the "sudden drop in end demand for electronic products...is forcing our customers to announce severe cuts in their production." Who are ASML's customers? Companies like Toshiba, Taiwan Semiconductor Manufacturing Company, Samsung, and Intel, which supply the electronic guts to customers like Sony, Nokia, Compal Electronics, and Hewlett-Packard. (Samsung and Toshiba are also large consumers of silicon from the chip-making arms of their companies.)
Thursday, ASML announced that it was cutting 10 percent of its workforce amid an "unprecedented" downturn. "Never before have we witnessed such a sharp and sudden fall-off in lithography system demand," said Eric Meurice, chief executive officer of ASML, in a statement. He attributed this to "an unprecedented mix of falling end-demand for semiconductors, weak memory prices and restricted access to capital for our customers."
Meurice went on to cite one of ASML's biggest customers, Toshiba, which announced on Monday night that it was cutting production for flash memory 30 percent, starting in January. Flash memory is one of the staple components of consumer electronics and computers and is used in everything from portable music players to digital cameras to PCs.
ASML plans to shut down production facilities for four weeks, spread over the first and second quarters of 2009. ASML's restructuring follows a similar move by U.S.-based Applied Materials, the largest chip gear supplier. In November, Applied said it was paring its global workforce by 12 percent or 1,800 positions. For the fourth quarter, Applied said fiscal 2008 net sales were $8.13 billion, down from $9.73 billion from 2007.
Semiconductor equipment forecast; a recovery isn't expected until 2010.
(Credit: Semiconductor Equipment and Materials International )"We're at levels we last reported in 2003," Dan Tracy, senior director industry research and statistics at SEMI, said in a telephone interview. Semiconductor Equipment and Materials International provides market data for the global semiconductor equipment market. "In our most recent data through October, orders for semiconductor manufacturing equipment were down over 50 percent from the peak in 2007."
Tracy said orders for automotive chips--a giant market--have also "slowed down dramatically in the fourth quarter."
Japanese chip equipment makers, some of the largest in the world, saw orders sink 71 percent in November from the same month last year as customers cut spending, according to a Reuters report Wednesday, citing the Semiconductor Equipment Association of Japan.
"This was the 21st straight month of year-on-year declines as the financial crisis hurts consumer appetite for computers, digital cameras, and TVs," Reuters reported.
To top off the bad news, market research firm iSuppli issued a report Wednesday forecasting that worldwide semiconductor industry revenue is set to decrease by 9.4 percent in 2009 to $241.5 billion, down from $266.6 billion in 2008. iSuppli had previously predicted 6.8 percent growth for the same time period.
In the more immediate future, iSuppli said in the fourth quarter "excess semiconductor inventories could balloon up to $10.2 billion in value, up 268 percent, from $3.8 billion at the end of the third quarter."
Steep worldwide recessions "have resulted in a pullback of consumer spending on all types of electronic products," iSuppli said, leading the firm to forecast a decline in OEM (original equipment manufacturer) factory revenue for electronics equipment of 1.3 percent in 2009. The previous forecast had predicted 6.7 percent growth.
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.)
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