Chipmakers Can Expect Less Bang for Their Bucks

Hey, Big Spenders Chipmakers spend billions on equipment and fabs for new semiconductor processes
Company	Capital Expenditure Budget in $
Intel	$4.7 billion
IBM (expenditure for total company, not just semiconductor division)	5 billion
TSMC	1.65 billion
Texas Instruments	800 million
Source: Company reports

But semiconductor revenue certainly isn't growing at the same pace.

With the cost of a cutting-edge factory estimated at $1.5 billion to $2 billion, all but a handful of chipmakers are being priced out of the manufacturing business. The rest are going "fabless," meaning they outsource the actual production of semiconductors to so-called foundries.

Meanwhile, a few select chipmakers have plowed ahead with investments in new fabs that can process 300-millimeter-sized wafers, which produce 2.4 times more chips than the more common 200-millimeter wafers. Semiconductor companies are also continuing to shrink the size of transistor linewidths to a mere 90 nanometers, a move that not only reduces costs but also enables more functions to be integrated on a piece of silicon.

IBM's leading-edge 300-millimeter fab in East Fishkill, N.Y., which started pilot production in August, will ramp up into volume production throughout 2003. Texas Instruments' Dallas fab, now at 5,700 wafers per month, will produce up to 10,000 a month by the end of 2002. Both companies plan to begin producing on 90 nanometer linewidths next year.

Intel has positioned itself at the forefront of the shift to larger 300-millimeter wafers. With two 300 mm fabs now in production, Intel will have another up and running by the close of next year. By the end of 2003, up to half of all Intel's processors may be produced at 90 nanometers, estimates UBS Warburg.

Yet with Intel's capital spending expected to reach $4.7 billion this year, equal to 18% of expected revenue, some analysts maintain the chipmaker is investing too heavily -- even though capex has dropped from 27% of sales in 2001. A ratio of 10% to 15% is a healthier ratio for chipmakers, given slowing growth rates, says Banc of America's FitzGerald.

"They can't afford it because the end markets aren't growing enough," he says. "If they throw more money at it and the end markets are seeing slowing growth, they're just digging a bigger hole for themselves."

Intel CFO Andy Bryant declined to comment on its future spending strategy, citing the quiet period leading up to the company's January earnings release.

Yet in light of the so-so demand environment and expensive manufacturing assets, some think Intel will find it tough to maintain its return on invested capital. "That's the main reason behind our sell recommendation on the stock," says Merrill Lynch analyst Joseph Osha.