A collapse in memory spending, combined with a weak international economy, is driving a major contraction in semiconductor capital equipment spending, says international research firm Gartner.
Semiconductors are an important indication of the overall state of the IT industry, as they are a fundamental building block for the manufacturing of computers and other small electronic devices, such as mobile phones. Spending on equipment needed to manufacture semiconductors is, in turn, an indication of the state of that industry itself.
According to Gartner, worldwide semiconductor capital equipment spending is on pace to total $47.1 billion in 2008, a 25.7% decline from 2007. In 2009, spending is expected to decline another 12.8% and return to growth in 2010. These projections are down from Gartner's July forecast of a 19.8% decline in spending for 2008.
“The excess spending of 2006 and 2007 has hit home in 2008, as the semiconductor equipment industry will continue to feel the pinch well into 2009,” says Dean Freeman, research VP for Gartner's semiconductor manufacturing group.
He says the oversupply in the memory sector and a slowdown in consumer spending, due to the economic crisis in most of the G8 (which includes Canada, France, Germany, Italy, Japan, Russia, the UK and the US) economies are having an impact on consumer electronic consumption. This, in turn, impacts foundry and integrated device manufacturer spending.
Sector advantage
However, falling semiconductor prices is not necessarily a bad thing, as Freeman says it can be an advantage to other sectors as they can offer consumers more features at a lower price.
“You will likely see a further decline in portable devices, or at least a slow down as consumers focus their discretionary spending on necessities. We currently expect a slowing across all segments of the industry as the worldwide economy slows. We expect growth to return, starting in late 2009,” he says.
This slowdown in the semiconductor industry at the same time as a global recession looms is almost coincidental, as historically the semiconductor and semiconductor equipment markets have been somewhat detached from other financial meltdowns.
Freeman says, for 2008, the slowdown was a result of overspending in the memory segment where supply had outpaced demand. In 2009, the slump will extend from memory into other sectors, mostly as a result of consumers' slowing spend.
“With the number of financial consolidations taking place, one could draw the conclusion that you will see IT spending slow, but IT spending does not always follow the economy, as companies sometimes take these opportunities to use software to improve productivity,” he says.
No parallel
Gartner does not see a direct correlation between the slowdown in the semiconductor market and that of slowing PC or mobile phone sales just yet.
“We see PC sales continuing to be relative strong, over 10% on a unit base. Cellphones are slowing a bit, but they are still about 8%. Typically what happens in these slowdowns is that the memory manufacturers keep producing devices, as they need the cash flow,” Freeman says.
He notes that this time around memory manufacturers are taking older production offline as a way to decrease the supply and try to shore up pricing.
“Consumer spending is the better indicator for hardware, and we have seen and do expect the consumer spending to slow further as the economic decline moves a bit deeper,” Freeman says.
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