The Chip-Equipment Disconnect

NEW YORK (TheStreet) -- SEMI reported that North America-based manufacturers of semiconductor equipment posted a three-month average of worldwide billings in September 2009 of $624.6 million.

That figure is up 7.7% from the three-month average in August 2009, but before that, the last time the three-month average was at $625 million was August 1994. Clearly the semiconductor equipment industry is in turmoil, but we need to understand why this is happening.

The chart below shows the spread between semiconductor sales and semiconductor equipment sales between January 1994 and August 2009.

Comparison of Semiconductor and Equipment Sales Source: The Information Network

According to the Semiconductor Industry Association, worldwide sales of semiconductors in August were $19.1 billion. The last time they were at the $19 billion level was August 2005.

Quite a disconnect: four years vs. 15 years. Both the semiconductor and equipment industries prior to 2001 worked in tandem in a cyclical fashion of peaks and valleys every two years or so, as shown below. After 2001, however, the industry changed, with the semiconductor industry continuing its relentless growth while the equipment industry stayed relatively flat, save for the peaks and valleys reminiscent of the '90s.

There has been a flurry of positive news coming from the semiconductor equipment manufacturers of late:

• Lam Research(LRCX) reported its third-quarter profit nearly doubled.
• Mattson Technology(MTSN) noted revenues increased sequentially 38% over the second quarter of 2009.
• Brooks Automation(BRKS) expects fourth-quarter revenue to be up 45% from the third quarter.

Nevertheless, the semiconductor equipment market is still on shaky ground:

• Novellus Systems(NVLS) reported a year-over-year decline in net sales of 29%.
• Cymer(CYMI) said fourth-quarter revenue will be flat with the third.
• ASML(ASML) reported that sales in the latest quarter fell to 590.7 million euros from 696 million euros in the prior-year quarter but rose from 277 million euros in the second quarter.

Semiconductor manufacturers continue to underspend. Much of the problem is the transition from 200-millimeter to 300-millimeter diameter wafers. A 300-millimeter wafer can be used to make 2.25 times more chips than a 200-millimeter wafer in the same amount of time -- on equipment that can cost only about 20% more than its predecessor.