With a Production Glut Already Underway, Semi Equipment Orders Continue Unfazed

by: William Trent, CFA

The Semiconductor Industry Association [SIA] released their Global Sales Report for August Monday morning. Worldwide sales of semiconductors reached an all time monthly record of $20.5 billion in August, an increase of 10.5 percent from the $18.6 billion reported in August 2005, the report says.

Year/year growth of 10.5% is not all that bad for a mature industry like semiconductors (although it is down from the 11.7% year/year growth rate seen in July), especially given the perennial overhang of lower prices. It certainly bests the average growth of the last 10 years (which includes both the late 1990’s boom and the subsequent bust, so presumably should be just about right). Any guess as to the cumulative average growth rate in semiconductor sales over the last 10 years? If you said 5.9%, about in line with nominal GDP growth, you were right.

The problem is, no one seems to have told the semiconductor manufacturers that growth has slowed down. In August they placed orders for nearly 70% more semiconductor manufacturing equipment than they ordered one year ago. Comparing the growth rates from the SIA reported chip sales to the equipment order data from Semiconductor Equipment and Materials International [SEMI] yields the following chart:


Once that equipment gets installed there is going to be a glut beyond belief. This has already started to happen, according to the SIA press release:

“Inventories have risen both at semiconductor manufacturers and in the channel in recent months, but remain in line with requirements for the holiday build season,” [SIA President George] Scalise concluded.

We aren’t so sanguine. Orders for equipment have far outpaced sales growth throughout 2006, and there is no end in sight. With chip sales growth already off the July peak, heaven help the semi makers should an honest-to-goodness consumer slowdown unfold. The SIA appears unfazed:

Capacity utilization remains strong. VLSI Research estimates that capacity utilization, which was at 92 percent in the second quarter, will remain at 95 percent for the remainder of the year. Capacity utilization remains high even as new 300mm manufacturing facilities continue to come on line. Facilities producing 300mm wafers now account for nearly one-quarter of total capacity – up from less than 15 percent at this time last year.

Once that equipment gets installed there is going to be plenty of capacity. And nobody will be able to explain away the warehouses full of microchips as “in line with requirements.”

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