Trouble Brewing for Chip-Equipment Makers

A new report sees inventory builds contributing to lower revenue.
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Rising stockpiles and uncertain demand for flash memory chips could put the brakes on semiconductor fabrication equipment spending next year, according to a new report.

The chip equipment industry has enjoyed robust growth this year, with worldwide revenue up 23.5%, according to the industry research firm Gartner. But the trend will reverse next year, as revenue growth dips into negative territory, declining 2.7% year over year.

The report is the latest sign of trouble to hit the $42 billion chipmaking equipment market.

In August, the CEO of the world's No.1 chip equipment vendor,

Applied Materials

(AMAT) - Get Report

, told investors that the industry is entering what looks to be a challenging period.

"What we have heard from our semiconductor customers in recent weeks indicates that there is inventory building in the PC market," AMAT's Mike Splinter said. The extent to which that inventory gets "drained" in the next six months will determine spending on chipmaking equipment in the first half of 2007, he said.

Last month, industry trade group SEMI reported that the August book-to-bill ratio in North America dipped to 1.0, or parity, for the first time in six months. A book-to-bill ratio above 1.0 is considered a positive sign of future growth, since it means that orders to deliver new equipment are running higher than revenue recorded for already-sold equipment.

Chipmakers have rushed to add manufacturing capacity this year, driven primarily by consumers' appetite for consumer electronic devices such as MP3 players and digital cameras that use flash memory chips to store data.

But Gartner analyst Klaus Rinnen said chip-equipment makers are facing a number of worrisome trends such as "an increasing inventory situation, the strong potential for oversupply in both flash and DRAM if an increase in demand does not materialize, and the delta between equipment spending and semiconductor revenue growth."

"Combined," said Rinnen, "these conditions create a scenario that could lead to a slight correction next year."

Gartner predicted that spending on chipmaking equipment will recover in 2008 however, with revenue increasing 23%.

Vendors of packaging and assembly equipment will be the hardest hit in next year's correction, with growth declining 7.4% according to Gartner. Wafer fab equipment will slide 2.1% in 2007, while automated test equipment revenue is slated to dip 1.9%.