Why capital spending matters
The results usually include increased capacity and lower chip prices
By James Carbone -- Purchasing, 7/14/2005 2:00:00 AM
Capital spending by semiconductor companies will fall 5% in 2005, although most chip companies had strong revenue growth in 2004. Less capital investment in fabs and process technology means that prices for some components could rise in the future because there may not be enough capacity to meet rising demand.
While capital spending by the semiconductor industry will decline, market researcher IC Insights forecasts capital spending by the top 25 semiconductor companies will actually increase by about 3% in 2005 and those companies represent about 85% of all capital spending. Capital expenditures (capex) by all chip companies totaled $45.77 billion in 2004, a 41% increase over 2003. However, capex will drop to about $43.5 billion in 2005.
A lot of capital spending is being used to build new fabs, to transition from 200mm wafers to 300mm wafers and for 90nm process technology. Such investment is important to buyers. The addition of new fabs means more capacity. The transition to 300mm, or 12-in. wafers, means chipmakers will be able to get about 30% more chips per wafer. That effectively increases capacity and, depending on demand, could mean lower prices for parts. Transitioning to 90nm and below process technology results in more dense, lower-power ICs and can boost the number of chips per wafer.
Chip companies used to routinely increase capex following a strong year, says Bill McClean, president of IC Insights.
"In the past, a semiconductor company would have said 'I had a good year so I'll break the bank this year and build fabs,'" says McClean. They would do so in an effort to gain market share from competitors.
While semiconductor companies still want to gain share, they are, for the most part, taking a more cautious approach to capital spending and are watching the semiconductor cycle more closely.
"They are more in tune with the cyclical behavior of the industry and adjusting their spending accordingly," says McClean. Last year was the peak of the current cycle and this year there will be substantially less revenue growth so companies are being much more conservative about capital spending.
An example is UMC Group, a Taiwanese semiconductor foundry which builds chips for other semiconductor companies. UMC grew sales 42% to $3.9 billion in 2004, but its capital spending in 2005 will drop 40%, according to IC Insights. Other chip companies that had strong revenue in 2004 but are reducing their capital spending from 2004 include STMicroelectronics, Toshiba, Infineon and NEC.
Common sense
Basing capital spending on the semiconductor cycle makes sense to a lot of chip companies. For instance, TSMC, a Taiwanese foundry, had a 100% factory utilization rate in 2004. This year demand is weaker and its utilization rate is about 80%, says McClean. Adding a lot more capacity while demand is declining doesn't make sense for the company, says McClean.
Buyers should not be overly concerned that semiconductor companies are cutting back on capital spending in 2005 for several reasons. One is many chip companies invested heavily in 2004. Capital spending for the semiconductor industry increased 41% to $45 billion. Much of that was for new fabs and the transition to 200mm wafers to 300mm wafers. That capacity is coming online in 2005.
In addition, while capital spending may be reduced from the previous years, it does not mean chip companies are not investing at all. For instance, while UMC is reducing its capital spending by 40%, it will still spend about $1.5 billion in 2005.
While, many companies are reducing capital spending, some are increasing capex. Eleven of the top 25 will increase capital spending including Intel, Samsung, Hynix, TSMC, Powerchip, and Fujitsu among others.
It should come as no surprise that of the top-10 semiconductor companies, Intel, the world's largest semiconductor company, will increase spending the most. Intel plans to invest about $5.6 billion, a 46% increase over 2004, says McClean.
While that's a big increase in capital spending, Samsung, the number two global semiconductor company, will actually invest more. IC Insights says Samsung will boost capital spending 20% to $5.66 billion in 2005.
In 2004, Samsung's capital spending as a percentage-of-sales was higher than Intel's. Samsung's spending was 31% of its sales while Intel's was 13%. In fact, five other semiconductor companies in the top 10 had a higher spending as a percentage-of-sales than Intel. However, Intel's situation is unique.
It dominates the microprocessor market with about 85% market share.
"Once you are in a mature market and if you have most of the market share as Intel does, capital spending as a percent of sales eventually moves down," says McClean. "That's what's happening with Intel."
However, for most other companies to grow business and gain share, they need to invest in capital spending if they expect to gain market share. McClean says most companies need to invest 20-25% of their revenue in capital spending.
"If you are just spending 10% of your sales on capex, it is difficult to keep up with new technology," says McClean. "You're probably going to be falling behind. If you're spending 20-25%, then you are aggressive and probably gaining market share."
Samsung is a good example of a chip company that is aggressive in capital spending and has gained market share. It is the dominant player in DRAM with about 28% market share and is the leading producer of NAND flash memory chips.
Samsung typically boosts capex every year. This year it will invest in the transition from 200mm to 300mm wafers and convert more production to 90nm and below production, says Tom Quinn, senior vice president, memory sales and marketing. "Our philosophy on capex, especially in the memory business, is what you invest is reflective in how committed you are to the business," says Quinn.
Risky business
He says there are risks associated with large capex investments. "There is a latency between the time the money being committed and actually being spent and when you realize [the benefits] from that investment," he says. "No one has the ability to understand what the market conditions are going to be 18 months out when that capacity comes online. It can be a little bit unnerving."
Quinn says it is important for semiconductor companies to control IC capacity and process technology. "You have not seen Samsung trade technology for capacity in any of those creative arrangements," he says. "Market opportunities present themselves and if you don't have that capacity in place, you can't capitalize on that opportunity," he says.
Another company transitioning to 300mm wafers for its DRAM production is Infineon Technologies North America in San Jose, Calif., which will spend about $1.3-1.4 billion in 2005, says Ulrich Englert, director product marketing, memory products.
He says the capex will be used to transition more manufacturing to 300mm at its Richmond, Va. fab.
"We have been the leader in DRAM for 300mm manufacturing for a couple of years. We have converted most of DRAM capacity to 300mm and are ahead of Samsung." he says.
In fact, most of the capex is being used for 300mm wafer production, says McClean. "Eighty percent of Applied Materials orders are for 300mm equipment." Last year it was 50%. Applied Materials builds chip making equipment.
Englert says Infineon's capex will decline a little from 2005 when the companies spent about $1.5 billion in capex. One reason for the reduction is Infineon is using foundries more for production rather than building all of its chips in-house.
"Five years ago our foundry business in DRAM was zero," says Englert. "We have achieved a balance between foundry and our own business. About 20% of Infineon's business goes through foundries."
More outsourcing
Infineon isn't the only company using foundries more often to reduce the amount of capital spending. Companies like Freescale, Texas Instruments and STMicroelectronics are using foundries more.
"The trend is for semiconductor companies opting to use foundries rather than investing in new equipment." says McClean. Freescale coined the term 'fab-lite.' The idea was for Freescale to produce 50-60% of its own wafers internally and offload the rest. They wanted to keep their hand in semiconductor production, but not do all the investment in new fabs," says McClean.
Texas Instruments is doing the same thing. "TI uses foundries as a safety valve," he says. "It can adjust its capacity without having to invest in fabs." Companies that use foundries for some chip manufacturing save millions of dollars because they don't have to invest in new fabs or equipment.
Because more semiconductor companies are outsourcing chip production to foundries, buyers can expect chip companies' capital spending as a percent of sales to decrease in the coming years.
In fact, capital spending as a percent-of-sales will decrease industry-wide because of outsourcing and because there are fewer semiconductor startups.
"If you don't have new start-ups doing capital spending then capital spending as a percentage-of-sales will go down," says McClean. "New start-ups are the most inefficient spenders. They have to put in $2 billion to build a new fab before they have a dollar in sales," he says.
Top 25 2005 Capital Spenders*
| 2005 rank | Company | Headquarters | 2004 ($M) | 2005 ($M, budget) | '05/'04 % change |
| *Includes joint-venture spending **IC Insights' forecast is -5% Source: IC Insights, Company Reports |
|||||
| 1 | Samsung | South Korea | 4,778 | 5,725 | 20% |
| 2 | Intel | U.S. | 3,843 | 5,600 | 46% |
| 3 | TSMC | Taiwan | 2,275 | 2,600 | 14% |
| 4 | Hynix | South Korea | 1,455 | 2,000 | 37% |
| 5 | Sony | Japan | 1,395 | 1,525 | 9% |
| 6 | UMC Group | Taiwan | 2,480 | 1,500 | -40% |
| 7 | ST | Europe | 2,050 | 1,500 | -27% |
| 8 | Infineon | Europe | 1,585 | 1,500 | -5% |
| 9 | AMD | U.S. | 1,440 | 1,500 | 4% |
| 10 | Micron | U.S. | 1,500 | 1,500 | 0% |
| 11 | Toshiba | Japan | 1,875 | 1,480 | -21% |
| 12 | TI | U.S. | 1,298 | 1,300 | 0% |
| 13 | SMIC | China | 1,839 | 1,000 | -46% |
| 14 | Powerchip | Taiwan | 600 | 1,000 | 67% |
| 15 | NEC | Japan | 1,510 | 950 | -37% |
| 16 | IBM | U.S. | 900 | 950 | 6% |
| 17 | Elpida | Japan | 1,160 | 950 | -18% |
| 18 | Nanya | Taiwan | 1,140 | 900 | -21% |
| 19 | Renesas | Japan | 870 | 895 | 3% |
| 20 | Fujitsu | Japan | 465 | 860 | 85% |
| 21 | Matsushita | Japan | 755 | 820 | 9% |
| 22 | Chartered | Singapore | 686 | 750 | 9% |
| 23 | Philips | Europe | 740 | 625 | -16% |
| 24 | Winbond | Taiwan | 100 | 600 | 500% |
| 25 | Freescale | U.S. | 522 | 450 | -14% |
| Top 25 Total | 37,261 | 38,480 | 3% | ||
| Others | 8,344 | 6,850 | -18% | ||
| Total | 45,605 | 45,330 | -1%** | ||
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