Chip suppliers overinvest in new equipment in '04

Staff -- Purchasing, 11/18/2004

The semiconductor equipment market, in the midst of a boom that's expected to lift revenues by 46.7% in 2004 to $22.7 billion, will slip back slightly (about 4%) in 2005.

The projected decline in 2005 is the result of a combination of too much capacity as semiconductor manufacturers overinvested in equipment in 2004 and a drop off in chip demand. That means chip companies will need to cut back on equipment purchases in 2005, says market researcher The Information Network.

"Our analysis shows that only 37% more equipment needed to be purchased in 2004 and another 10% in 2005 to meet semiconductor growth of 27% and 5% for 2004 and 2005," says Robert Castellano, president of the market research firm. "Anything above 37% equipment growth in 2004 would have to come from 2005 equipment sales. And obviously anything above 47% would drop 2005 into negative territory," he says.

He says the industry investments amount to combining two years of equipment purchases into something "eerily reminiscent of the 2000 boom followed by the 2001 bust."

Castellano speculates that semiconductor executives overinvested in equipment in 2004 for one of two reasons: fear that leadtimes for equipment would be long and that they might not get the equipment when they needed it, or greed and a belief that the more chips they made, the more marketshare they could steal from each other.