Chip-Equipment Spending Set to Slump

An industry research firm expects worldwide spending to fall 0.7%.
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After growing 25% in 2006, the semiconductor capital-equipment market is set to contract slightly in 2007.

Industry research firm Gartner projected Wednesday that worldwide spending on chipmaking equipment will total about $42.1 billion in 2007, down 0.7% year over year.

The abrupt change of pace reflects the highly cyclical nature of the chipmaking equipment industry, in which chipmakers and foundries beef up their manufacturing capacity during times of strong demand and pare back investments as their business slows.

In the past several months, several chip companies, including

Texas Instruments

(TXN) - Get Report

and

National Semiconductor

(NSM)

, have reported slowing sales and rising inventories among distributors.

The boom in spending on chipmaking equipment in 2006 was driven by strong investments among makers of commodity memory chips, said Klaus Rinnen, the managing vice president of Gartner's semiconductor manufacturing and design research group.

"In 2007, a softer macroeconomic sales environment for electronics, combined with excess semiconductor inventories and strong 2006 capacity investments, will cause a small contraction in equipment demand, but it will not be a collapse in demand," Rinnen said.

Gartner predicted that spending on semiconductor capital equipment would rebound sharply in 2008, growing 20%.

Shares of leading chipmaking equipment companies showed little impact from the bleak near-term outlook.

Applied Materials

(AMAT) - Get Report

, the world's No.1 maker of chipmaking equipment, was up 1%, or 17 cents, at $18.32.

KLA-Tencor

(KLAC) - Get Report

, which makes equipment for testing and managing factory chip yields, was up 1%, or 46 cents, at $50.15, while

Novellus Systems

(NVLS)

shares were off 13 cents, at $33.98 in midday trading.

In a separate report released Tuesday, industry trade group SEMI reported that the book-to-bill ratio for North American chip-equipment makers remained below 1, at 0.97, in November. A book-to-bill ratio above 1 is considered a good sign of future demand, indicating that new customer orders are exceeding current revenue.

According to the Gartner report, equipment to package and assemble chips will fare the worst next year, with spending falling 5.7% according to Gartner.

Wafer-fabrication equipment spending will be relatively flat in 2007, growing by 0.6%. While several key memory manufacturers have recently pushed out equipment-spending plans, these push-outs appear to be temporary as market supply and demand adjusts. Leading-edge technology that requires equipment for making chips with advanced 65-nanometer and 45-nanometer circuitry should be hot.

"The driver of investments in 2007 is a combination of a revival of logic-related investment as the year progresses and continued strength in commodity memory," said Rinnen. "In fact, our current statistics show that memory spending could potentially reach a new high, accounting for 50% of total capital spending. And therein lays the biggest risk and volatility for 2007."