No Upturn for Semi Equipment Until June at Earliest

by: Robert Castellano

The semiconductor equipment market will continue to be on a downward slope at least through the end of May.

Our leading indicators, which determine inflection points in economic activity and which we utilize to show turning points in semiconductor equipment sales five months out, continue to point down, indicating that there will be no upturn through May 2009. (If you go here and click on the Contact Us button, and we will send you a gif file showing our correlation between semiconductor equipment purchases and our proprietary leading indicators.)

With semiconductor inventories reaching $10 billion and fab utilization dropping, semiconductor manufacturers will be making technology purchases in 2009 compared to capacity purchases. Remember, equipment purchases may drop 20-50% as some speculate, but they will not drop to zero revenues, so equipment will be purchased in 2009.

How does one invest in equipment stocks in an environment where there is seemingly little light at the end of the tunnel? What criteria does one use to judge stocks and on what basis? How are fundamentals of a company determined? Does bigger mean better?

What about quality of a product. How often is that input in the decision by an analyst to rate a stock? Who better to judge than two of the top semiconductor manufacturers in the world. I'm speaking of Intel (Nasdaq: INTC) and TSMC (NYSE:TSM) about their Quality Supplier awards for 2008. According to Intel,

These suppliers provided products and services deemed essential to Intel's business success in 2007. They excelled at meeting and exceeding high expectations and tough performance goals to distinguish themselves from the thousands of suppliers that work with Intel.

Below is a list of Intel's award winners announced in 2008:

  • AceCo Precision Manufacturing supplies fab spares and refurbishment
  • Asyst Technologies, Inc. (Nasdaq: ASYT) supplies automated material handling systems
  • Cabot Microelectronics Corp. (Nasdaq: CCMP) supplies CMP polish slurries for flash and logic technologies
  • Daifuku Co., Ltd. supplies automated material handling systems
  • Dainippon Screen Manufacturing Co., Ltd. supplies capital manufacturing equipment and spares and services
  • DEK International GmBh supplies printing machines
  • Delta Design, Inc. supplies handlers and burn-in tools
  • Dow Corning Corporation supplies thermal interface materials and adhesives
  • Enplas Semiconductor Peripheral Corporation supplies burn-in sockets
  • Harbor Electronics, an ECT Company, supplies turnkey test interface units (TIU)
  • Integrated Device Technology, Inc. (Nasdaq: IDTI) supplies PC, server and notebook clocking solutions
  • Indium Corporation supplies solder thermal interface materials
  • JSR Corporation supplies advanced photoresists, packaging materials and CMP consumables
  • KES Systems & Service (1993) Pte Ltd. supplies burn-in boards, TIUs, BIB/TIU/UBID maintenance
  • Linde Electronics, a member of the Linde Group, supplies electronic gases and total materials management
  • Lotes supplies connectors and sockets
  • Munters Corporation supplies VOC abatement equipment
  • Murata Manufacturing Co., Ltd. supplies ceramic capacitors, ferrites, inductors, RF modules and dielectric filters
  • Nichicon Corporation supplies aluminum electrolytic and polymer capacitors
  • Nihon Dempa Kogyo Co., Ltd. (NDK) supplies crystals and oscillators
  • Nikon Corporation supplies lithography scanners
  • Nippon Chemi-Con Corporation supplies aluminum electrolytic and polymer capacitors
  • NuFlare Technology, Inc. supplies mask writers
  • Richtek Technology Corporation supplies power management solutions
  • Rofin-Baasel supplies laser mark equipment
  • Rosendin Electric provides electrical construction services
  • Securitas Security Services USA, Inc. provides security services
  • Siliconware Precision Industries Co., Ltd. provides assembly and test services
  • STATS ChipPAC Ltd. provides full turnkey packaging and test services
  • Tektronix Inc. supplies validation test equipment
  • The Hibbert Group provides marketing collateral fulfillment services
  • Tokyo Electron Limited supplies semiconductor production equipment
  • Taiwan Semiconductor Manufacturing Company, Ltd. provides foundry services
  • Tyco Electronics (NYSE:TEL) supplies CPU sockets, connectors and passive components
  • Veolia Environmental Services provides hazardous waste transportation and disposal

From what I've been able to determine, TSMC last year gave the award to:

  • Air Products (NYSE:APD)
  • BASF Electronic Materials
  • Cabot Microelectronics (Nasdaq: CCMP)
  • Hitachi Kokusai Electric
  • Novellus (Nasdaq: NVLS)

Neither Intel nor TSMC purchase photomasks from outside suppliers. So I'd like to add my two cents to this list – photomask manufacturers. Technology purchases by semiconductor manufacturers means that they are buying equipment and materials for next-generation devices, such as 32nm devices.

Photomask manufacturers tend to reap the rewards of technology purchases because new photomask sets are needed in order to manufacture ICs at smaller dimensions. A next-generation mask set for 32nm can cost more than $1 million. Multiply that by the new ICs introduced by all the semiconductor manufacturers and that could equate to a market we forecast to reach $3.4 billion in 2009. There are actually two U.S. companies making photomasks for ICs. Photronics (Nasdaq: PLAB) and Compugraphics, a subsidiary of Princeton, N.J. based Rockwood Specialties.

Quality means different things to different semiconductor companies. It means having a product of excellence or superiority. But it means more. To Intel, it means a Company that is willing to go the extra distance by "meeting and exceeding high expectations and tough performance goals to distinguish themselves from the thousands of suppliers that work with Intel."

And who makes up a company? People. It's too bad that during the cyclical downturns it is the People who lose their jobs for the sake of the bottom line, which is good for shareholders, but ultimately not good for the Company. I wonder who will be Intel's top suppliers in 2009 after the economy-ravaged equipment and material suppliers get back on their feet in 2010.

Disclosure: Author holds a long position in PLAB