Chip Manufacturing Orders Down

CNET reports that orders for the equipment is used to manufacture chips has decreased. According to CNET, the orders for equipment reflects the situation for the entire computer value chain. Apparently orders are at the lowest for some time. CNET argues the industry is being plagued by both the financial crisis and the difficulties in the memory industry. CNET writes:

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."

This is inline with the expectation that companies will hold on to their cash (see Pundits urge companies to tighten belts, hold cash). The reason is clear. Anticipated weak demand in the near term future is forcing companies to cut back on capacity expansion directly and reduce their capital expenditures to ensure they are able to survive the storm. Companies will also be reluctant to raise debt right now as the mistrust in the credit markets has made the issuance of debt very expensive. Furthermore, borrowing money from the bank creates additional leverage with no certain mechanism to guarantee payments in the short term.

CNET: Chip gear industry's funk is a red flag