Expect flat capital spending by chip makers in 2006

Staff -- Purchasing, 10/20/2005

Worldwide capital expenditures by semiconductor companies will be flat to slightly down this year and next year, according to a survey by researcher IC Insights. However, the amount of investment varies sharply by region.

There will be 15% increase in capital spending by North American device makers in 2005 compared to 2004. Korean semiconductor manufacturers are now planning to increase capital spending by 19% in 2005. However, semiconductor companies based in Japan, Europe, and Taiwan are cutting capital spending in 2005 by 7%, 18%, and 2%, respectively.

There had been sharp swings in quarterly expenditures during the first half of 2005, but semiconductor capital spending trends are moderating and holding relatively steady.

In the first half of this year, industry capital spending sequentially grew 12% in the first quarter compared to the fourth quarter of 2004, but then plunged 19% in the second quarter.

Planned outlays now show capital spending sequentially declining 3% in third quarter and another 2% in the fourth, resulting in a flat year for expenditures, totaling $45.8 billion in 2005.

In the survey of chip companies, IC Insights finds that some spent more than two thirds of their budgeted capital spending in the first half. Taiwan Semiconductor Manufacturing Co. in Taiwan budgeted $2.6 billion for capex, but had spent about $1.75 billion by the end of June. Philips Semiconductor used only about one third of its planned capital expenditures (capex) in the same period.

Some companies have trimmed their capex plans. SMIC in Shanghai had planned to make $200-240 million in capital spending in the third quarter, but cut that back to $120-160 million because of longer leadtimes for fab equipment and delays in qualification for advanced technology nodes.

IC Insights estimates that capital spending as a percentage of semiconductor industry sales will be only 19% in the third and fourth quarters, which is down significantly from 25% in the first quarter. If worldwide semiconductor revenues grow 5-10% in 2006 and semiconductor suppliers keep their spending ratio near 19%, a flat-to-slightly down spending environment will prevail in 2006.