Recovery in both semiconductors and equipment has begun from lows reached in early 2009. However, as shown below, semiconductor sales (dotted line) are nearly back to where they were in September 2008 when the downturn in the industry started. Revenue in October 2009 was down only 5.5% from the September 2008 level.

On the other hand, semiconductor-equipment sales in November 2009 are down 42.3% from levels reached in March 2008, the start of the downturn in the equipment market.

As I noted in my TheStreet.com column on July 27, 2009, "In January 1995, 11.4% of revenue generated by semiconductor manufacturers was spent on new processing equipment. Forward to May 2009 and only 3.8% of semiconductor revenue was spent on equipment." Through October 2009, that figure is now at 3.4%.

There have been very bullish forecasts about the semiconductor-equipment market for 2010 in recent weeks. SEMI (Semiconductor Equipment and Materials International) issued a press release on Dec. 1 forecasting a 53% increase in 2010 following a 46% decrease in 2009.

Gartner issued a release on Dec. 11 forecasting a 56.6% increase in 2010 following a 48.1% decrease in 2009.

Both forecasts are based on technology purchases for 2010. SEMI in a different press release suggested that there will be no new fabs built in 2010 and pointed out that there were also no new fabs built in 2009.

These comments beg the question how will the equipment market grow 50+% in 2010 with no new fabs and no new capacity additions when it dropped nearly 50% in 2009 with no new fabs and no new capacity additions?

That leads to a follow-up question, will technology purchases alone sustain 50% growth? Reaching 50+% growth will result in nearly $20 billion in wafer fab equipment purchases for technology improvements, $7 billion more than in 2009 for a net zero growth in new fabs built.

We need to look to the lithography sector a bit more closely, as it historically makes up about 25% of equipment purchases -- in 2008 the lithography sector recorded revenue of $5.4 billion according to our analysis, while the total wafer processing market was $22 billion.

But will the lithography market grow 50+% in 2010 to maintain its historic 25% of the wafer processing equipment market? Intel ( INTC) is already purchasing immersion lithography tools from Nikon.

In 2009 we estimate that 59 immersion steppers were sold, primarily by ASML. In 2010, more than 90 will need to be sold to generate 50+% growth. That's a lot of tools priced at $45 million each.

Interestingly, Cymer ( CYMI), a major supplier of lasers for immersion lithography tools, was downgraded on Dec. 23, by GC Research from overweight to neutral. Also, on Oct. 15, ASML ( ASML), the lithography market leader, was downgraded by Citigroup from hold to sell.

One would think that with a projected growth of 50+% we would have seen the reverse. Our analysis points to a growth in the semiconductor-equipment market of less than 20% in 2010 but with 50+% growth forecast in 2011. Time will tell.

As I stated on TheStreet.com on July 31, 2009, "For 2009, we forecast that the semiconductor equipment market will drop 46%. In contrast, we forecast the semiconductor market will drop 26% in 2009. Most importantly, growth in the equipment market will continue through 2012, increasing 20% in 2010 and 49% in 2011."
Robert N. Castellano, Ph.D, is President of The Information Network, a leading consulting and market-research firm for the semiconductor, LCD, HDD and solar industries. Castellano is internationally recognized as one of the leading experts in these areas. He has nearly 25 years of expertise as an industry analyst. Castellano has provided insight on emerging technologies to many business and technical publications, including Business 2.0, BusinessWeek, The Economist, Forbes, Investor's Business Daily, Los Angeles Times Magazine, The New York Times, USA Today and The Wall Street Journal. He is a frequent speaker at conferences and corporate events. He has over 10 years' experience in the field of wafer fabrication at AT&T Bell Laboratories and Stanford University before founding The Information Network in 1985. He has been editor of the peer-reviewed Journal of Active and Passive Electronic Devices since 1985. He is author of the book "Technology Trends in VLSI Manufacturing," published by Gordon and Breach. His book "Solar Cell Processing" was published in 2009 by Old City Publishing. He received his Ph.D. in solid state chemistry from Oxford University.