Semiconductor CAPEX Down - TSMC Capex Increases

The number of semiconductor companies spending more the one billion US dollars in 2009 on capital expenditures (CAPEX) has declined from eight in 2008 to just three in 2009. Fabtech cites an IC Insights reports. According to Fabtech:

The elite of the elite as far as semiconductor capital spending is concerned are in desperate need of new members, otherwise the ‘Billion-Dollar Club’ is in danger of closing its doors. According to IC Insights, only three companies, Intel, Samsung, and TSMC, are planning CapEx of over US$1.0 billion in 2009, down from eight companies in that club in 2008, and 16 companies in 2007.

Intel still sits at the head of the table with spending plans of US$4.7 billion, Samsung with US$4.5 billion and TSMC with its revised upward plans for US$2.3 billion spending in 2009. Compared to spending in 2008, Intel is spending 10% less, Samsung by as much as 33% less and TSMC is the only one increasing spending by 23%.

Capital spending as a percent of semiconductor sales will barely top 12% in 2009. Considering that it reached a record low of 16% in 2008, there is little joy for equipment suppliers.

However, the good news is that IC Insights believes this will lead to much stronger IC average selling prices (ASPs) beginning in 2010 and extending through 2012. Thus generating the profit margins required for greater capital spending.

Fabtech gets it right when it says this provides serious issues for equipment suppliers but this is nothing new and they were probably expecting the decline. Last year in August in Chip Manufacturing Orders Down we quoted a CNET article that anitcipated this decline. So really it is nothing new or surprising. Most companies have struggled in the past year and planning expensive capital projects is difficult to do when orders are not coming in. One would imagine it would take a longer period of time for these equipmenet manufacturers to recover. I assume the manufacturing companies will first need to develop a solid forecast of future sales before they start to invest.

There are some encouraging signs though. Earlier in the week we saw PC Demand is Climbing and other reports out of Taiwan suggest some parts of the chip design sector are in recovery mode with EDN reporting Top 20 semiconductor companies saw 21% sales surge in Q2, Reuters reporting Chip packager ASE sees higher Q3 shipments and the Wall Street Journal (WSJ) reporting MediaTek 2Q Net Profit Jumps 80%; Sees Stronger 3Q.

There does seem to be some sort of recovery in the semiconductor sector. Of course this will be driven by the consumer, enterprise and organizational spending on products and equipment that will largely be driven from demand and perception among users at the end of the value chain. From the consumer perspective, lower average selling prices on chips will make products cheaper so it does make products more appealing to consumers.

As for CAPEX spending by the big guns, well it might take a longer time and cycle for this to increase and enable the equipment manufacturers to increase their sales.

FabTech: Billion-Dollar Club’ members depleted

Financial Crisis Affects Semiconductor Industry

Yesterday in Financial Crisis Pushing Taiwan's Tech Sector Down we noted how the financial crisis is affecting Taiwan's tech sector. Of course the financial crisis is not only wreaking havoc with the tech sector in Taiwan but with the global hi-tech value chain. Yesterday Reuters noted the president of SEMI as saying there will be a significant decline in global sales of semiconductor equipment. According to Reuters:

Global sales of semiconductor equipment are expected to fall 28 percent to $30.9 billion this year as deteriorating world economies prolong a slump in the chip sector, industry association SEMI said on Tuesday.

SEMI said sales had declined to levels last seen in 2003. Earlier this month, it said North American chip-equipment orders fell 28 percent in October, while in Japan they plunged 68 percent as chipmakers slashed or even froze spending.

"We anticipate a second year of double-digit decline in 2009," SEMI's President and Chief Executive Stanley T. Myers said in a statement.

SEMI said it expected a 21 percent decline in 2009 followed by 31 percent growth in 2010, although it was relying on history repeating itself as it had little else to go on.

"Impaired or non-existent business trend visibility is pervasive amidst the deteriorating global economy. Therefore our outlook for 2010 is based on patterns of previous industry recoveries," Myers said.

In related news, yesterday Kaohsiung based Applied Semiconductor Engineering (ASE), the world's largest chip packager, has cut is Q4 revenue outlook by between 25% and 28%. According to the Taipei Times:

Advanced Semiconductor Engineering Inc (ASE, 日月光半導體), the world’s biggest chip packager, yesterday slashed its fourth-quarter target, blaming accelerating contraction in demand amid a global economic slowdown.

ASE said fourth-quarter revenue could decline by between 25 percent and 28 percent quarter-on-quarter, rather than its forecast of a drop of between 15 percent and 20 percent a month ago, following in the steps of semiconductor heavyweight Taiwan Semiconductor Manufacturing Co (TSMC, 台積電), which recently trimmed its outlook.“As end demand is shrinking faster amid deteriorating global economic prospects, the company’s fourth-quarter revenues will be lower than the forecast it made on Oct. 31,” ASE said in a filing to the Taiwan Stock Exchange.

The current financial crisis and associated slowing of demand and in the semiconductor industry is continuing to wreak havoc with the entire hi-tech value chain.

Reuters: Chip equipment sales seen down 28 pct in 2008-SEMI
Taipei Times: ASE cuts fourth-quarter sales forecast

MEMS Market Attracting more Players

In Taiwan Manufacturers Move into MEMS market we noted that TSMC, UMC and ASE were all moving into the micro-electro-mechnical system (MEMS) market sector. In TSMC Increases Their CAPEX we noted TSMC were upgrading their 0.35 micron processes to be able to accomodate MEMS systems.

Reuters noted yesterday that the growth of the MEMS market due to the rapid adoption of motion sensor chips in the Wii gaming devices and the Apple iPhone has provided an increased incentive for the world's chipmakers to jump into the market. Reuters notes TSMC had sat on the sidelines of this sector for sometime but has now jumped into the market, confirming the earlier reports. Reuters observes:

Chip makers are convinced of the potential for motion sensing chips in portable gadgets, thanks to the success of Nintendo's Wii game consoles and Apple's iPhones.

The market for micro-electro-mechanical systems (MEMS) devices, which detect motion using acceleration sensors, could reach $7.3 billion this year and $11 billion by 2011, Taiwan chip maker TSMC has said, quoting independent research.

However, although there is growth opportunities in this sector, the sector is still small. Reuters writes:

In dollar terms, the MEMS market is still relatively small for firms that generate billions of dollars in revenue each year. But potential growth is triple that of the meager 4 percent rise that TSMC projected for the entire $280 billion semiconductor market this year.

But with chip manufacturers facing a downturn in demand for memory and logic chips, the growing use of motion sensing devices in mass market gadgets, such as phones and music players, offers a chance to boost sales.

At its annual technology symposium in May, Taiwan Semiconductor Manufacturing Co Ltd (TSMC), the world's top contract chip maker, featured MEMS as among the most promising new technologies.

"TSMC sat on the sidelines for several years but now appears convinced that MEMS is ready for prime time with consumer electronics and mobile applications," iSuppli analyst Richard Dixon said.

"Following iPhone's lead, which put motion sensing to the core of the stunning display, we expect to see (MEMS) mobile phones rapidly expand as manufacturers scramble to differentiate with similar functions."

NEW DEVICES

TSMC, which has started making MEMS chips for Analog Devices , could see the business make up 10 percent of its total sales this year, with the ratio growing to 20 percent in the next 2-3 years, Taiwan's Topology Research said.

Rival United Microelectronics Corp (UMC) is also reportedly preparing to supply similar chips later this year or next, although the company declined to comment.

MEMS suppliers that traditionally made most of their revenue in the automotive sector have reached the limits of capacity, and many have chosen either to upgrade their manufacturing technology, like STMicro or Freescale, or to subcontract out production, iSuppli's Dixon said.

In an interview with Tech-ON, the head of TSMC's MEMS business Robert Chin-fu Tsai discussed TSMC's movement into the sector. Mr. Tsai said:

MEMS output is about 4,000 chips per month at both Fab2 and Fab3. Considering that the output capacity of both lines is slightly more than 100,000 chips per month, MEMS production accounts for a tiny portion at the moment. This amount will expand rapidly, however, in the second half of this year.

The number of MEMS devices to be mass-produced will increase all at once from late 2008 to early 2009. Among the multiple MEMS projects we are currently conducting, three will enter the volume production phase within 2008 and one in early 2009. In accordance with this schedule, the ratio of MEMS production is likely to increase at Fab2 and Fab3 first.

This is another new sector for Taiwanese companies and once again they are leveraging their pure-play foundry strengths to establish a dominant position.

Reuters: Chip makers get moving with motion sensing chips
Tech ON: TSMC Discusses MEMS Foundry Biz

Taiwanese Chip Assemblers Investing in China

Powertech Technology Inc. and Advanced Semiconductor Engineering Inc. (ASE) have both been granted permission by the Ministry of Economic Affairs (MOEA) to fund investment projects in mainland China. China Economic News (CENS) says:

With the permission, Powertech will invest US$100 million to open a brand-new test and packaging factory in southern or central China to keep up with rising demands from memory-module maker Kingston Technology and other customers in the mainland.

ASE is ratified to put US$90 million into expanding an operating factory in Shanghai to keep it advantageous in the intensifying competition in the mainland`s test and packaging market.

However, in return for receiving permission to invest in the mainland, both Powertech and ASE have pledged to invest significant sums back into Taiwan. CENS says:

Powertech pledges to invest NT$8 billion (US$266 million at US$1:NT$30) over next few years to boost capacity at a factory in northern Taiwan, which was completed early this year, and increase 1,000 jobs. Also, MOEA officials said Powertech planned to inject NT$20 billion (US$666 million) into Taiwan`s operations and create 2,000 jobs in next stage of its investment plan.

For ASE, the commitment as return for government permission is to put a total of US$550 million into Taiwan`s operation and increase high-ranking jobs for Taiwanese talents over next three years.

Both companies seem to be convinced they need to invest in China. Powertech argues many of their companies are located there and to be able to service their needs they need to be closer. Whatever the reason, this investment, in the short term at least, seems to be a win-win for both the Mainland and Taiwan.

I am sure over the next few months we will see more and more Taiwanese chipset makers and assemblers investing in China. Previous legislation prevented them from doing so as there was a fear that the high-tech knowledge of these companies would be used in Chinese military applications against Taiwan. The new president Ma Ying Jeo has said he will provide more flexibility to chipmakers and follow the US government guidelines on what technologies can be manufactured in China.

Article: Two Taiwanese Chip Assemblers Approved to Invest in China

Effect of Sichuan Earthquake

The huge earthquake to hit Sichuan province will not, many believe, have a significant impact on the chipset supply chain.Both Intel and Semiconductor Manufacturing International Corporation (SMIC)have operations in Chegndu but no one is expecting these to effect the supply chain. Digitimes says:

Despite concerns the 7.8-magnitude earthquake in Sichuan, China may have a possible impact over ongoing IC supply as Intel and Semiconductor Manufacturing International Corporation (SMIC) both run IC backend facilities in the region, industry players from Taiwan caution against overreacting.

Most industry players from Taiwan believe that impact from the quake should be short-lived. Recalling experience from the 921 earthquake that shook central Taiwan nine years ago, sources at Advanced Semiconductor Engineering (ASE) indicated that company operations were only affected for one day. They added in saying that industry players should not overreact and noted that other packaging and testing houses would not "benefit" from a sudden influx of orders.

Sources at SMIC's Chengdu Cension Semiconductor Manufacturing fab said the fab activated anti-quake measures and production resumed during the evening of May 12. Monthly capacity of 7,000 8-inch wafers was not affected, they added. This Chengdu fab mainly focuses on power management IC (PWM IC), high-voltage IC and niche memory production.

The Chinese-language Economic Daily News (EDN) quoted SEMI senior director of industry research and statistics Dan Tracy as saying that Intel is flexible enough to adjust its capacity mix, meaning the quake impact should be limited. Tracy also commented that impact should be limited for other semiconductor companies such as SMIC.

Some sources from the packaging and testing industry were also quoted by another EDN report as saying that the majority of backend production at the Intel fab in Chengdu is dies instead of wafers, meaning that any damaged chips could be replaced relatively quickly. They also added in saying that Intel outsources up to one-tenth of its IC backend production orders to other partners.

Currently ASE is partnered with Intel for the packaging and testing of southbridge chips and some NAND flash memory, while Siliconware Precision Industries (SPIL) is also partnered for southbridge and some networking chips, according to industry players.

However, since some of the production capacity has been affected, Intel are considering moving some of their production to other plants. According to China Economic News (CENS):

Intel Corp. is reportedly mulling delegating part of its production at its test and assembly factory in the earthquake-stricken Sichuan Province of mainland China to its other factories and pure assemblers including Advanced Semiconductor Engineering (ASE) and Amkor.

CENS also speculates that Intel will have to outsource some of its testing to other companies. CENS says:

Taiwanese industry watchers estimated Intel might contract ASE and Siliconware to test and assemble south-bridge chips for the chipsets and some logic chips waiting at the Chengdu factory. ASE is running a factory outfitted with 1,500 wire-bonding machines in the mainland. The factory will double output capacity by the end of this year.

Although the the factories may not have been damaged, the damage on the overall infrastructure in Chengdu may have an effect. Shortly after the September 21 earthquake in Taiwan in 1999 (921)there were rolling power cuts for a month. The same may happen in Chengdu. CENS reports water and electricity have already been cut. I should also imagine many of the transportation routes have also been cut off and the remaining routes saturated with humanitarian aid. It will take some time for the infrastructure to be ready for full production capacity and for the supply chain to run smoothly.

Of course the priority now for the authorities there must be to deal with the human tragedy.

Article 1: Taiwan packaging and testing companies caution against quake-impact overreaction
Article 2: Intel May Switch Production From Quake-stricken Sichuan Plant to Shanghai

Taiwanese Companies and XBox

The China Economic News (CENS) reports TSMC, ASE and Nanya are benefitting from Microsoft orders for chipsets for the latest XBox360. CENS reports:

Microsoft began in April farming out production of 65nm graphics chips and north-bridge chips for its latest version of XBox360 game consoles to Taiwanese foundries Taiwan Semiconductor Manufacturing Co. (TSMC), Advanced Semiconductor Engineering Inc. (ASE) and Nanya PCB Corp.

CENS continues:

TSMC is chosen to make the 65nm graphics chips and north-bridge chips for Xenon chips, ASE is contracted to package and test the two chips, and Nanya has won orders to supply flip-chip packaging substrates. The contract has booked a total of foundry capacity for around 10,000 300mm wafers at TSMC, currently the No.1 player of silicon-foundry industry worldwide.

People familiar with the contracts said Microsoft ordered 50% more contract packaging and testing capacity as well as flip-chip substrate in the second quarter than the first one, giving a boost to Nanya and ASE in their revenue growth this quarter.

Microsoft has also contracted two Asustek spinoffs to manufacture the actual consoles. According to Digitimes:

Pegatron Technology and Unihan Technology, two OEM makers spun off from Asustek Computer, have reportedly secured OEM orders for Xbox 360 consoles and will undertake the production at their factories in Suzhou, China, with an initial monthly shipment volume of about 500,000 units, according to industry sources in Taiwan.

The same Digitimes article also continues saying Wistron, the original contract manufacturer for the XBox, has declined to continue manufacturing them because of a reduction in the gross profit margin.

Article 1: Microsoft Contracts Taiwanese Foundries to Build Latest XBox360 Chips
Article 2: Asustek subsidiaries reportedly land OEM orders for Xbox 360 consoles