The 2005 downcycle in the semiconductor capital equipment market is here. The good news is the current downcycle will be more of a “digestive” phase of the industry’s shallow over-capacity, rather than a deep industry recession as in 2001.
The average quarterly semiconductor equipment shipment rate receded in 1Q05 and will continue to do so in the coming quarters. Compared with an average of $9.45 billion from 1Q04 through 1Q05, the average from 3Q05 through 2006 will be about $7.76 billion. However, while this represents a decline of almost 18%, it is also more than 40% higher than the average quarterly shipment rate for the 2002 to 2003 period. Last year, the market surged to correct serious underinvestment in the face of strong semiconductor demand, and it is now settling down with shipment levels that commensurate with longer-term industry growth trends.
Although 2004 was the third-highest growth year in industry history, it still did not cross into the irrational exuberance mode of recent cycles. Expansions were relatively well-controlled. As the semiconductor industry moves to a slower growth period of its business cycle, the equipment industry will respond with lower shipment rates required for slower capacity expansion. Overall, semiconductor manufacturers are maintaining their investment discipline and investing carefully, and in some cases strategically, to gain market advantage. We expect customers to spend cautiously, releasing orders late and hesitating, until a strong demand trend can be established.
The remainder of 2005 and much of 2006 will be a guarded time for the industry as the industry determines how much capacity to add and when to do it. Ramping up too fast could lead to overcapacity and a longer downcycle; ramping up too slowly could lead to tightening inventories and increasing average revenue per unit. Our most likely scenario has the WFE industry declining in 2005 as well as in 2006, and then entering into sustainable recovery in the second half of 2006.
Focusing specifically at the packaging, assembly, and test portion of the semiconductor market (commonly referred to as back-end equipment, or BEE), we see that after an excellent year in 2004, 2005 has brought a substantial decline in the BEE market. Since mid-2004, this market has realized quarterly declines in revenue performance with one modest tick up in Q1 of this year. Gartner Dataquest believes the back-end equipment market will decline about 19% by the end of this year, falling to $7.6 billion. We believe the market will likely bottom out throughout the second half of 2005 as utilization rates begin to tighten. Sales should rebound by more than 20% in 2006. As in the past, the major consumers of BEE will be in the Asia/Pacific region. Over the next 2 years, expect above market performance for advanced packaging and test process tooling such as flip chip bonders and SOC testers.
After falling behind the test market in 2004, the packaging and assembly equipment (PAE) portion of the BEE market will this year surpass the test market in total sales. PAE sales will exceed $3.8 billion, while test equipment revenues will fall just below that mark. Leading all BEE segments in growth will be advanced packaging lithography. Memory testers will still be the largest individual segment generating more than $1.4 billion in total sales (Figure 1).
As we look further ahead, we expect equipment sales will remain at lower levels through the first half of 2006 before starting a sustainable recovery. The cyclical peak is anticipated for 2008, with equipment sales reaching the $50 billion mark before entering into a new downcycle.
JIM WALKER, VP research, semiconductor packaging and assembly, may be contacted at Gartner Dataquest, 251 River Oaks Parkway, San Jose, CA 95134; 408/468-8483; e-mail: firstname.lastname@example.org.