NEW YORK ( TheStreet) -- The business climate for the semiconductor equipment industry is being undermined by chip manufacturers, not the economy. It is widely known that semiconductor revenue coordinates well with gross domestic product. If economic conditions are favorable globally or regionally, consumers will have the resources to purchase items that contain semiconductors, whether they be PCs, cell phones, or automobiles. One would think that there would be a correlation between semiconductor sales and equipment purchases, as more and newer equipment would be purchased to manufacture the additional chips. Historically, there was this correlation until the downturn in the industry in 2001. One of the major culprits has been the move to 300mm wafers, which as we have written about previously, utilize half the amount of equipment to process the same number of chips because of the two-times increase in silicon real estate on a 300mm silicon wafer compared with a 200mm wafer.
As the "Great Recession" has decreased in intensity, our proprietary leading indicators have been moving up since they turned in March 2009.
As shown above, semiconductor revenue has followed since the inflection in March. If we take a look at a similar comparison between our proprietary leading indicators and semiconductor equipment, we see that the inflection point for equipment didn't occur until May 2009, but, more importantly, equipment revenue hasn't tracked our leading indicator curve. There have been forecasts of late pointing to 50% or more growth in the semiconductor-equipment market in 2010. Unless a paradigm shift occurs in semiconductor buying strategies, those numbers will be far off the mark.
If you look at the different chart below, you will see how the semiconductor market (line) has continued to rebound after 2000 while there has been quite a divergence between semi and equipment revenue since that time, compared with pre-2000.
Recovery in both semiconductors and equipment has begun from lows reached in early 2009. However, semiconductor sales (dotted line on the chart) 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. The answer to the problem is that semiconductor manufacturers need to spend. According to IC Insights, the $1 billion cap-ex spenders include the following firms in 2010: Samsung ($6 billion); Intel ( INTC) ($5.3 billion); Taiwan Semiconductor ( TSM)($3 billion); Hynix ($2 billion); Toshiba ($1.95 billion); GlobalFoundries, a partnership that includes Advanced Micro Devices ( AMD)($1.9 billion); Micron ( MU) ($1.3 billion); Nanya ($1.1 billion); and Elpida ($1 billion). -- Written by Robert Castellano in New Tripoli, Pa.