This week SEMI released their latest data on fab equipment spending forecasts for 2013 and 2014. Before you think that so far upstream in our supply chain has little to do with your daily challenges, remember that supply is critical to pricing and trending for availability. We cannot just consider what the demand trends are, rather we put upstream and downstream, supply and demand together to try to figure out what in the world is likely to happen.
When will they spend the money?
So, who is spending money and why? According to the SEMI report, 2011 was the last year there was a year-over-year (YoY) increase in fab equipment spending. Last year, 2012, there was a -17.8% contraction indicating a holding pattern at then current facility investments, nodes, and wafer sizes; further evidencing what we talked about last year, that we were in a 'wait and see' holding pattern due to economic volatility and general uncertainty in demand (see this article from SST.
This year, equipment spending is actually expected to continue the decline, but only by -0.4% YoY from 2012. Conversely, while equipment spend will continue to go down, albeit slightly, SEMI data indicate that construction spending in 2013 is expected to rise:
Fab construction spending is now expected to increase 6.7 percent with construction spending to reach almost US$ 6 billion. In 2014, however, construction project spending is expected to contract by about 18 percent. Construction spending is led by TSMC, with seven different projects for the year; followed by Intel. Fab construction spending in China will increase by a factor of four due to Samsung’s Mega fab in Xian.
Why the declines?
Beyond the strategic holds we see played out along the semiconductor supply chain due to economic supply-demand questions and inventory management concerns, what appears to be an ever greater dampening factor in CAPEX is cost. We all know that the cost of new fabs, whether construction or simply front end equipment purchases are exceeding the budgets of all but the largest companies in the industry. With price tags in the billions of US dollars, fab expansion, let alone construction, has become a significantly capital-intensive investment. As a direct result, the incremental equipment purchasing has reduced in step.
What has been increasing though is research and development (R&D) which grew to US $53.0 billion in 2012, according to a recent IC Insights report. This R&D trend can be understood as a precursor to investment in new production. Forecasts from these and other industry analysts do point to a rebound in CAPEX for both construction and equipment due, in part, to a need for capacity expansion at the newer nodes and wafer sizes. SEMI's report forecasts a significant rise in 2014 in equipment spending, roughly a 24% YoY increase equaling US $3.93 billion.
This forecasted increase in equipment spending is an indicator of more capacity at the leading nodes and architectures. Last year we did see a good pick-up in the 2x-nm levels, but was definitely a strong year for the 32nm scale, as SST's recent drill-down underscored. Simultaneously, there continues to be a decrease in IC suppliers, concentrating one-third of 300nm wafer production to just five companies, as IC Insights investigated.
Meanwhile the upstream fab trend continues to be one of oligopolies, driven by the skyrocketing costs for fabs. It is not just at these high-end fabs that costs are increasing and suppliers are dwindling in number, we have seen the same trend for memory, more recently. As IC Insights points out in a different report, consolidations have squeezed DRAM manufacturers down to three as a result of the high cost and risk upstream. With the reduction in suppliers, average selling prices (ASPs) have seen a boost, which has certainly helped the memory market as well as the overall IC and semiconductor markets more generally. Memory CAPEX continues to be trimmed, which means continued tightening of supply as new lines are not likely to be prolific in the near future.
In sum, CAPEX continues to be very strategically allocated meaning that capacity is being held in check, resulting in ASP increases as supplies are at times constrained simply because of the reduction in suppliers and the hold on the number of lines available. The larger OEMs are, of course, able to command front of the line preferences for supply meaning that the rest of the semiconductor supply chain is likely to face more volatility as a result of OEM builds in addition to the normal factors affecting supply and pricing.