Novellus: Customers are Incrementally More Cautious

Following on the heels of the lower-than-expected guidance from Applied Materials just a short week ago, Novellus provided investors with a mid-quarter update after the close of today's trading session.

In a nutshell: Customers of Novellus have become incrementally more cautious and they have curtailed their expansion plans. CEO Rick Hill said a contagion developed amongst the customer base that was spawned by the nervousness that gripped some members of the sector in July (during Semicon West). This weakness or, fear, was described as the confidence level device makers have for end demand out nine months from now. Given the way orders are trending it is, in essence, a vote that says device makers have no confidence in the economy.

Other highlights:

• 9.3% growth in the PC market for this year seems reasonable but those customers have been more cautious.


• DRAM pricing is weak and demand is also weak. On the other hand, logic (microprocessors) still seem reasonable because of diversity in their application.


• Not all the markets look terrible, smartphone and tablet forecasts continue to look robust.


• NAND continues to be a bright spot.


• Semiconductor utilization rates remain below seasonal levels


• Novellus expects spending for wafer fab equipment in this year to be in the range of $30 to $32 billion and expect demand to be pushed in to '12.

Guidance: For Q3 expect bookings to be down 15% to 30%. Guidance for shipments and revenues was narrowed to $300 to $320 million

EPS $.65 to .75 to the high end with the Q3 tax rate being a major influence.

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This reminds me of an analogy that many industry veterans use to describe the way these cycles develop: "If I tell you it is bad and you tell someone it is bad, they tell someone else, and then that person tells someone, before you know it, it gets bad."

My $0.02 -- I don't think things are going to turn up until the early months of next year.,

Electronics Enters and Era of 'Systemic Risk

From EE Times and yesterday's Global Foundries Conference we hear from several industry leaders. The header for the discussion:

Electronics enters era of 'systemic risk'

During a panel at the conference Aart de Geus, chief executive of Synopsys, had this to say:

"We're not just dealing with silicon scaling complexity but with a kind of systemic complexity where being best-in-class in one area is not sufficient to avoid risk and risks are going up."

"It's a winner-takes-all situation with whole ecosystems racing to high volume systems, so value chains become very important."

A strong value chain is required today and it will be even more important in the next few years. Recall my comments the other day about the need to have everyone in sync when the industry transitions to 450mm wafers:

Applied Materials and the Semi-Equips

The chain extends well beyond the fab and the packaging house. If you are one of the remaining high volume producers of smartphones, tablets and, heaven forbid, PCs, you are bound to be a part of that chain. Hopefully your partners are all in sync.

Also on the panel was Warren East, chief executive of ARM. Supposedly he tipped his hat to Apple when he said,

"As products get more complex, no one company can provide everything, but some can provide a great deal of the system."

Hmmm... We're going to find out how good the Apple foodchain is over the next couple of quarters. Everyone knows that TSMC is the company that they want to make the next iteration of their processor (A-6). A good friend, a process expert that works right in the trench, had this to say when asked about TSMC's efforts:

I guess then the 28nm scaling of some long-in-the-tooth device technology coupled with a new form of packaging technology could provide for a perfect “s”-storm scenario. That ought to have someone at Apple concerned, I would think, not to mention TSMC. If it causes them to skip a beat on getting new products out relative to the steady drum-beat of new product announcements in the past – put in context after the Jobs resignation – and you could easily have a lot of folks shouting “See, I told ya so.” Rarely do those types do enough digging to realize the pre-cursor to such a hiccup was already set into motion while Jobs was still at the helm.

It is anticipated that the The A-6 processor, as noted on many tech sites, will hit the market in the second quarter of next year. It will be interesting to see if that time line can be met. What if it doesn't work? Will they go back to rely on Samsung?

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Is the chip industry really getting close to the wall? The challenge of improving chip yields, a subject we have been discussing on my mailing list over the past two weeks, was mentioned by the panel:

"Process technology tolerances are edging closer to design rule margins, affecting chip yields which can be in single digits as new nodes first come up. That means changes in IC design can more readily impact manufacturing yields."

Single digit yields (and in some cases a bit higher) are exactly what we are hearing about today. Maybe we are getting close to the wall? Speculation that the end is near has been going on for years. Perhaps it is just going to take more time to get past the challenges?

Micron 2011 Summer Analyst Conference

Earlier this week Micron held their Summer Analyst Conference. As always, there’s some interesting data in their presentation. The first link sends you to a document that is 77 slides long so you might want to peruse it in the off hours.

Things I find most interesting:

• WW DRAM capacity will not exceed levels reached in ’08 (Slide 72). This says a lot about the PC business.


• WW NAND capacity will exceed DRAM capacity in Q1 ’13 (Slide 73). This speaks to the smartphone/tablet trends and the adoption of SSDs in the enterprise.


• Everything about the Embedded Solutions Group (starts on slide 25) -- Automotive!

Micron Summer Analyst Presentation (PDF Download)

IC Market to top $300 billion in 2013

This is one of those stories that has been floating around the semiconductor industry since the mid 90's:

IC market to top $300 billion in 2013 - ElectroIQ.

However, IC sales will exceed $300 billion for the first time in 2013. The IC market first topped $10 billion in 1980, $100 billion in 1995, and $200 billion in 2005. While 10 years passed from $100 billion to $200 billion, the $200 billion to $300 billion jump will take only 8.

I believe Gartner (at that time they were known as Dataquest) was the first to put out a forecast that talked about $300 billion in annual sales. After the dot.com bust not many were willing to venture out on the limb.

Long range forecasting in times of uncertainty...... I dunno.... I suppose somebody's got to do it!

And the strongest growth will happen in... drumroll..... :

The largest growth for IC application segments will belong to automotive chips. Analog vehicle chips will see 32% market growth in 2011. The Automotive Special Purpose Logic/MPR segment and 32-bit MCUs won't be far behind. Sophisticated safety systems, driver information systems, and engine control units will keep the automotive IC market active through 2015

Very cool!

Applied Materials and the Semi-Equips

I suppose I could comment on HP and the news from Apple but there’s plenty of fodder for that on the worldwide InterTubes. Instead, I thought I would wordsmith a few comments about yesterday’s report from Applied Materials.

I’ve said it and heard it from others in the industry: “The Achilles heel for most capital equipment companies, and for that matter, semiconductor companies, is the inability to see changes in end demand.” Jim Bagley made this clear a few years ago at SEMI's Industry Strategy Symposium when he pretty much said he really didn’t care what was happening in the end markets because their job (at that time he was with Lam) was to stay in step with Moore’s Law.

You have to admit, they are focused.

To AMAT's credit, they have been pretty open about the weakness they were seeing in the PC markets. That really makes you wonder when Intel is going to say something negative.

On the AMAT call and the report…

I doubt that there was an investor out there that didn't expect bookings to be down and the outlook to be weak. I won't bore you with those details. I did find it interesting to hear management talk about foundries moving equipment from under-utilized trailing edge nodes, 65nm, to 28nm production lines. I’ve pinged folks in the industry to learn more about migrating old equipment to advanced lines. I know it has been going on for years but now we're talking about some serious reuse. If you have any insights please feel free to chime in.

From what I hear yields at 32nm and below are very low – some suggesting that good yields are below 20% (yes, there are some exceptions - Intel and a few of the bleeding edge memory companies but generally advanced yields are not good). I also hear from my moles that getting yields up is going to take longer than expected. KLA’s management team made this very clear on their earnings conference call. If anyone knows, they should. I posted some of KLA's comments here:

More Capital Spending Revisions - Tokyo Electron

As for next year, AMAT’s management talks about spending for 20nm and 14nm device production. Well, there are issues here – particularly with inspection and measurement – not to mention the cost of the lithography bay. A few folks in the inspection and measurement business have suggested that when the industry reaches 22nm inspection will hit the wall. We’ll likely hear more about this but I’ll say it now, “You can’t measure and you can't fix what you can’t see.”

For posterity let’s assume the up cycle kicks in again and AMAT does get orders for 20nm and below – call it a couple of years worth. After that we head to bigger, 450mm, silicon wafers. Uh, Oh! Remember this one?

When Getting Bigger Makes You Smaller

If only a few chipmakers are able to buy the 450mm tools, then the R&D costs must be passed on to that small universe. The tool vendors are bound to be impacted financially, perhaps severely. Either way, a small number of buyers means more development costs have to be absorbed by the tool vendors. Said another way - the tools are more expensive in smaller volumes.

What I am trying to get my arms around is exactly who is paying for 450mm development?

And if all the big semi-equip vendors develop 450mm tools, except for just one in the critical chain of manufacturing, then the fab can’t operate. So lithography, etch, CVD, PVD, clean, robotics must all commit to develop in parallel. And to do so they must be motivated that the timing is right and the returns are there. Further they must have sufficient balance sheet to support a long time line effort where the returns are years out.

Yes, this could go on for hours…..

Moving along, I’ve got a lot of doubts about the solar business and a big recovery. AMAT is very optimistic about solar and they believe projects will get funded. They might…. I'll admit that I am a skeptic. I hate to say it but I suspect that in just a few short years we are going to see much higher efficiencies and we will regret funding a lot of these projects. Then again, maybe they are right and the money spigots will remain open…. Regardless of the economic considerations and our fiscal issues.

Messy, messy.

Last but not least, some thoughts on the stock…. I’m not a fan. There are companies out there in chipland that are growing faster and, of all things, yielding more than AMAT so I think it is best to look at them first. Where does the stock get appealing to me? I’d like to see a 4% dividend yield – at least.

The major semi-equip investment attraction is, and has always been, the volatility and calling the turn. That’s what keeps the hedge funds engaged with the group. Without the hedgies p/e’s for the group would likely fall further. Using some of the newly revised Wall Street estimates, say $1.10 for CY11, and less than that for CY12, I believe the share price of AMAT, which is currently trading at ~9.9x that number, does not reflect larger earnings cuts ahead.

We will know when we have arrived, as the volatility will discount the p/e rather than be a premium. Semiconductor capital equipment companies are cash rich, mature and will either institute a dividend or up their dividend. As all mature companies do. Notable is the fact that 3M and CAT have higher p/e’s.

Go figure.

If you are interested in hearing more discussions like this feel free to join the INFRASTRUCTURE mailing list.

LED Supply and Demand

IMS Research has released the MOCVD chapters of a 300-page Quarterly LED Supply and Demand Report that details some big-time shifts in MOCVD adoption for LED manufacturing.

Excerpts are in order:

In June, the previous quarter’s report lowered the annual GaN LED revenue growth forecast to just 4% to $8.7B on rapid 1H’11 ASP reductions from a rising surplus, slower LCD and LED panel growth and the lighting market not yet cost competitive. With growth slowing, margins shrinking, the oversupply worsening and credit in China tighter than expected, LED manufacturers have pushed out a significant number of installations in 2011 resulting in a surprisingly large MOCVD shipment downgrade.

IMS Research has lowered its 2011 GaN MOCVD forecast by 24% to 833 reactors, which still represents 4% growth over 2011 as shown below. Smaller capacity growth should slow down the LED oversupply and stabilize pricing which will benefit near term LED manufacturer profitability and eventually lead to more tool sales resulting in an upgrade to the 2012 outlook.

Q2’11 GaN (gallium nitride) MOCVD shipment results whose highlights included:

• Shipments were down Y/Y for the first time since at least 2008, falling 14% if Veeco’s MaxBright reactors were excluded as Veeco has not yet recognized revenues for this new tool in according with GAAP.


• Including MaxBright reactor shipments, installations were still down 2%.


• Excluding MaxBright shipments, China continued to dominate the market, accounting for 70% of installations with Korea and Taiwan at 11% each.


• Lextar was the top customer in Q2’11 and 9 of the top 10 customers had operations in China.


• Aixtron remained #1 in GaN MOCVD shipments, gaining 4 points of market share to 57% excluding MaxBright with Veeco losing 3 points to 41%. Including MaxBright reactors, Aixtron’s advantage slips to 49% vs. 48% for Veeco, the closest it has ever been between the two competitors.


• By region excluding MaxBright, Veeco led in China, USA and Europe while Aixtron led in Korea and Taiwan. Veeco’s K465i remained the industry’s most popular tool, but Aixtron’s CRIUS II and G5 each gained share and rose to the #2 and #3 positions.


• The 4” shipment share rose more than 50% while the 6” share more than doubled as companies move to larger wafer sizes to boost their output and lower their costs.

There's even more in the full release so check it out:

IMS Research Downgrades 2011 and Upgrades 2012 Quarterly GaN LED MOCVD Forecast – New LED Entrants and 2011 Delays Boost 2012 Outlook

Aside from how this will influence Veeco and Aixtron, one should bear in mind that Applied Materials is getting in to the reactor business. Folks that are interested in how they are doing on this front should tune in to their earnings report coming August 24. Surely someone will ask questions about their progress during the call.

 

Pre Buyout Call: Google/Moto Mobility

Referencing the Google/Motorola Mobility deal today Felix Salmon writes: "Whither the M&A Scoop?"

Not so fast!

Believe it or not, a call for this buyout was made two weeks ago. This author makes the case - pointing out many of the items being discussed today:

Quick and easy fix for all Android patent problems. Google should buy Motorola » Unwired View.

If you look hard enough the scoop is still out there. It's just a matter of finding it amidst all the noise.

Now you have to wonder what will happen with the chipmakers that are supporting Android? In particular, Texas Instruments, Qualcomm and Nvidia.

 

Roundabout: Semi-Industry Deconsolidation, IBM, Intel, Apple, Death of the PC

Until a bit of the dust settles on Wall Street I've decided that it is best to cruise the modern InterTubes for stories about the chip industry. Here are a few that I have been pondering:

Over on the EE Times website Mentor Graphics CEO Wally Rhines writes a piece about the deconsolidation in the chip industry:

Semiconductor Industry, Deconsolidation

Figure 1 shows that semiconductor revenue based upon foundry wafers grew to about 20% of total semiconductor sales by the year 2000 and then remained flat for most of the next decade. The 20% share of revenue assumes that fabless semiconductor companies sell their foundry-produced products at about a 2X multiple of their foundry cost. This 20% share has recently begun to grow again. Exceptionally large capital investments by foundries in 2010 and 2011 will inevitably increase the share of semiconductor wafers sourced from foundries.

I think it is important to recognize that this most relevant to the fabless chip houses and not those that have manufacturing facilities - foundry or IDM. Much of the consolidation in the semiconductor food chain has taken place in the capital equipment business and its supply chain.

This story was linked to another, longer article Wally released over a year ago: Is Semiconductor Industry Consolidation Inevitable?

Most interesting to me was this observation on Page 2:

Looking back across the past six decades, TI (Texas Instruments) is the only company that has remained in the top ten throughout semiconductor history. When consolidation does occur, it is mostly among those companies that fail to adapt to the next level of emerging technology.

Never under-estimate the big Texan.

While I was reviewing this I was thinking about some of the comments made by the Gartner analysts during Semicon West - see this article I wrote last month for a few of their thoughts:

When Getting Bigger Makes You Smaller

I'm torn. On the one hand I understand the opportunities the fabless semiconductor companies have and the ways they can leverage foundry technology. At the same time I believe the cost of designing a device, getting wafers processed and getting a product in to the market with enough volume to be recover these non-recurring engineering costs - much less make money - will be more challenging as the manufacturing side moves to more advanced technologies.

I also tend to agree with the Gartner folks that the cost of processing silicon at the most advanced levels will pare down the number of companies that can actually finance and build a wafer fab.

I'm open to opinions on this front....

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In other stories of the week, the PC has died several times:

Mark Dean, IBM CTO for IBM Middle East and Africa writes that they are leading the way in the post PC era. Every article I've read is quoting this line:

But, while PCs will continue to be much-used devices, they’re no longer at the leading edge of computing. They’re going the way of the vacuum tube, typewriter, vinyl records, CRT and incandescent light bulbs.

Intel, obviously, takes issue with this: Intel CFO says view unshake by US debt downgrade

Families buying their first PCs in emerging markets, the source of half of Intel's sales, are unlikely to put off their purchases because of troubles in the United States, CFO Stacy Smith said in an interview with Reuters on Monday.

We'll see if demand really does hold up. I have my doubts. Several stories from Taiwan are noting weak demand (but optimism for the latter part of this year and next):

Compal sees drop in July revenues and notebook shipments

Acer unlikely to increase notebook orders until September

Are companies optimistic because they believe Ultrabooks will save the day? Intel is putting some skin on the line. Yesterday they created a $300 million development fund:

Celebrating 30 years of innovation, the PC is the ultimate Darwinian device and Intel is striving to again reinvent mobile computing,” said Mooly Eden, vice president and general manager of Intel’s PC Client Group. “In 2003, the combination of Intel’s Centrino technology with built-in WiFi, paired with Intel Capital’s $300 million in venture investments and other industry enabling efforts, ushered in the shift from desktop PCs to anytime, anywhere mobile computing. Our announcement today is about Intel mobilizing significant investments to achieve the next historic shift in computing.

There are three key phases in Intel’s strategy to accelerate its vision for this new category. The company’s efforts begin to unfold this year with Intel’s latest 2nd Generation Intel® Core^TM processors. This family of products will enable thin, light and beautiful designs that are less than 21mm (0.8 inch) thick, and at mainstream prices. Systems based on these chips will be available for the 2011 winter holiday shopping season.

One thing is for sure, Intel will not go down without a fight. A few folks believe Apple has them in their plans:

Apple Roadmaps Intel to 14nm

Intel will not win the tablet market with any of the various Atom chips rolling out at 32nm, 22nm and even 14nm. They are too late to a game that Apple owns 90% of today and will so in the future. All of these ultra low power atom versions are like the Saturn test rocket developments that preceded the Apollo 11 Moon Landing. They are necessary test chips where engineers at Intel try out new circuit designs and architectural tradeoffs in tuning power vs performance in preparation for a set of chips co-architected with Apple and appearing in 14nm.

Lots of speculation here...

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I suppose I could post 150 links to stories that talk about the market cap gyrations between Apple and Exxon. Either that or I could tell you to calm down and quit worrying about the market action. Nah.....

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Last but not least, from the humor side, a P.S to a comment on a "Buy stocks, sell bonds" post by Felix Salmon:

p.s. after the titanic hit the iceberg, on a relative basis, the stern was where you wanted to be.

Hang in there!

Digitimes - Hmm... 2H 2011 Tablet Market Report

Is my e-mail late or what? Just happened to notice that Digitimes is out late this afternoon hawking a report on the tablet market. In their promotional release they say they expect unit shipments to total 65 million for the year. Apparently they have come to the conclusion that Apple has 58% of the market but the non-iPad camp is catching up fast. They admit, at least in the e-mail I received, that Apple remains the dominant player but these new entrants are "posing a threat to the iPad."

The release also states that Texas Instruments is the company to beat in core application processors.

Here's a link to the story and the TOC for the report:

Expectations for the 2H 2011 tablet market.

A quick search shows another story here:

Apple iPad to account for 61% share of global tablet market in 2011, says a new report from Digitimes Research

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Yeah, this is going to raise some eyebrows this weekend.

Canaries in the Chip Mine

Over the years a number of companies in the semiconductor and semiconductor equipment community have been labeled as "Canaries in the Coal Mine." Back in the mid-90's my partner(s) at INFRASTRUCTURE tagged wire bond equipment supplier Kulicke & Soffa as one of the most important canaries. We had several reasons for doing this:

1) K&S tools are shipped to assembly houses with relatively short lead times.
2) Swings in demand for wire bonding tools typically preceded up and down turns in the semiconductor cycle by a few quarters.

Pretty straightforward stuff….

As time passed we continued to add indicators to our arsenal in an attempt to improve our sense of where the industry was headed. I say "attempt" purposely here because I will readily acknowledge that no set of indicators is perfect. By no means do I want to imply that we nailed every cycle turn. That said, gathering information about run-rates and subtle nuances in the food chain became a centerpiece of our work. "Eclectic" was how some described the collection of data points we accumulated .

Up and down the food chain we searched - starting with raw materials for wafer manufacturing all the way to those OSAT houses (Outsourced Assembly and Test) that were sending board-ready devices to the subcontract assembly business. As for the eclectic, here's a few examples: We would ping companies that supplied the vegetable inkers that were used to mark bad devices during the final testing process - thinking that changes in the demand for vegetable ink (yes, vegetable ink) could be linked to variations in unit volumes. Along the same lines, monitoring die banks at the OSAT houses became important. Companies like Amkor, Silicon Precision Industries and Advanced Semiconductor Engineering often talk about die banks on their conference calls. Amkor's Ken Joyce had this to say on their July 27 call:

"All we can say is what we see, I can’t speak for the entire industry, but what we see is that there has been a buildup in the die banks in our factories, and what does that tell us, and who are the customers that are building in there? Well, they’re actually one step, once the front end makes the decision to put those into production, they take them and they give them to us and that’s good news. I think what we’re seeing there is that our customers and their customers downstream are managing their inventories really very closely, and it probably is somewhat of a reflection of what I talked about a few minutes ago, this cloud of uncertainty that’s started to rise with respect to the demand picture."

The full transcript is here:

http://seekingalpha.com/article/282475-amkor-technology-s-ceo-discusses-q2-2011-results-earnings-call-transcript?find=die%20bank

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Instead of waiting for the companies to tell you what die banks were doing we would check to see if demand was rising for wafer storage containers and die carriers. If demand was jumping there it could be construed that the OSAT houses were shelving processed wafers before they ran them through the test and assembly process - building a die bank. For finished (tested and packaged) devices, demand for die carriers would suggest there wasn't any pull through from their downstream customers.

I could go on because every layer has its own little food chain. Who supplies bearings and actuators for automation systems, metal components for process tools, lasers and alignment components for scanners, etc, etc. This is just a few of the ways to get a pulse on the chip business - that is, if you really want to dig deep.

Most folks have no inclination to spend their days digging around in the semiconductor food chain. It's a lot of work. If you choose that route but still want to have a good idea of what is happening in semiconductor land then I would suggest you tune your attention to Microchip Technology. Microchip has proven to be accurate at calling cycles time and time again. Their management team, in my opinion, is the "Canary in the Coal Mine."

If you would have listened to Microchip when they pre-announced July 11 you probably would have sold every chip-related issue in your portfolio (and been a lot richer today). Last night the company issued their quarterly report and here's what CEO Steve Sanghi had to say:

"We believe that our June quarter results reflect weak overall market conditions, which we believe will impact the broad-based semiconductor industry in the June or September quarter, depending on the individual market exposures and revenue recognition practices of the company. Since then, we have seen this sentiment reflect to the earnings season with a weak guidance coming from Linear, Freescale, Texas Instruments, Silicon Labs, STMicroelectronics, Intersil, Micrel, NXP Semiconductors, IDT, Power Integration and others. The semiconductor supply chain is confirming the same sentiment with weak guidance from TSMC and UMC on the wafer foundry side, Teradyne from the test equipment side, [indiscernible] in Applied Materials from the fab equipment side and Arrow Electronics from the component distribution."

"There could be some companies that are exceptions due to a particular product transition or momentum in a given application segment, but we continue to believe that most companies will see the weakness manifest itself as the quarter progresses and their guidance is likely to be too aggressive."

"The broad-based global weakness seen [ph] has also been reflected by large multinational industrial conglomerates like Emerson Electric Co. Last week's Durable Goods report also cited that new orders for durable goods fell unexpectedly in June and a weak June quarter GDP report and a very weak ISM Index this week caps it all."

"Our long-term investors and analysts have seen Microchip experience these industry events first. Microchip tends to see changes in business conditions earlier than most of our peers due to a number of factors. Number one, we recognize distribution revenue on a sell-through basis worldwide. Number two, we run very short lead times, which gives customers more time to make purchase decisions based on more current business conditions. And number three, we have a large number of small- and medium-sized customers who tend to be quicker in adjusting their inventories."

The full transcript is essential reading for anyone interested in the sector. You can find it here:

http://seekingalpha.com/article/284899-microchip-technology-s-ceo-discusses-q1-2012-results-earnings-call-transcript?source=yahoo

I would also suggest that you put the shares of Microchip on your radar screen. In fact, run some comparisons against the other household names in the semiconductor business. Microchip has a stellar track record of profitability, stock performance and a 4.40%+ dividend to boot.

Full Disclosure: I have no position in Microchip or any of the companies mentioned in this note and I won't have any positions until I hear the Canaries singing a different tune.

Foundry Overcapacity and Opportunities in EDA Companies

Recently Mentor Graphics CEO Walden (he's know as Wally to many folks) Rhines said some things about overcapacity in the foundry business. Apparently he told this to reporters at the Tech Design Forum 2011 last month:

"But I have some concerns about the growth next year because capital investment in foundries in 2010-11 has been very high and there is some worry that there would be some oversupply."

He's worried about a price recession for devices in the second half of next year although he expects that dip to be overcome by demand growth in those markets we hear about so often - mobile, automobile, and security - to name just a few.

He goes on:

"The problem is that you have doubled the investment in foundry wafers while investment in memory is very modest. So I would expect the fabless companies will find that there is a plenty of capacity starting second half of next year leading a likelihood of price competition in fabless semiconductor industry."

Putting further spin on the situation he notes that this would be short-lived as long as we have economic growth. Well, that's certainly true. If the economy grows folks spend money on electronic gadgets. Growth in the semiconductor industry is totally linked to growth in worldwide GDP - an irrefutable fact.

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I've written recently that during the first half of this year the foundries have dramatically slowed their rate of capital spending. Aside from the ramp that is taking place at Global Foundries there just hasn't been a lot of buying. Last night we heard from United Microelectronics Corporation - presentation materials from the report are available here and here.

In a nutshell, flat sales, declining profits and factory utilization rates of less than 75% are what to expect for the next three months. No predictions were made about the fourth quarter - which is similar to what we’ve been hearing from everyone else in the industry.

As for their capital spending plan, UMC is sticking to their $1.8 billion target for this year as they ramp their 40nm process technology. They will also begin to install 28nm production tools late this year for production ramps next year.

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The concern I have with overcapacity rests on two items: 1) We need healthy Global GDP Growth to absorb the production and 2) How improving foundry yields will impact the number of devices generated at the 40nm and 28nm nodes. The latter point being one I mentioned in a previous note. These yields are bound to go up as companies move along the learning curve.

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Circling back, as the market swan dives I'm getting more interested in the EDA companies. Mentor Graphics, Synopsys, Cadence Design Systems and Magma Design Automation are on my radar screen. Shares of the largest player in this field, Synopsys, are really starting to get interesting. On August 17 the company will provide an update. I will be most interested in the forward view - assuming the world hasn't ended by then. :-)

Intel Widens Lead: Still Numero Uno in Chips

IC Insights released a research bulletin earlier this week noting that the chip industry grew 8% in the first half of this year. They also said that Intel widened their lead over Samsung as the largest chipmaker in the world.

"As shown in Figure 1, Intel remained firmly in control of the number one spot in the ranking. In fact, Intel extended its lead over second-ranked Samsung by registering a 43% higher sales level than Samsung in 1H11 as compared to a 24% margin for all of 2010."

 



The rest of the story is here:

http://www.icinsights.com/news/bulletins/1H111H10-Top-20-Semiconductor-Sales-Increase-By-8/

 

Expensive Key AdWords - The Top 20

Too much red on my stock screens so a bit of surfing is in order this morning.

First up, another story about OMAP from Texas Instruments heading to Google's Ice Cream Sandwich and possibly even the Nexus:

Google Chooses TI's New OMAP to Lead the Ice Cream Sandwich Charge

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Next, a slick graphic from Wordstream showing the Top 20 Most Expensive Keyword Categories in Google AdWords:

© 2011 WordStream, Inc.

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Most expensive: Insurance, Loans, Mortgages, Attorneys and Credit....

It figures.

More Capital Spending Revisions: Tokyo Electron

Similar to what we’ve heard from Lam Research, Novellus, Teradyne and others in the semiconductor capital equipment sector, Tokyo Electron has revised their numbers for semiconductor equipment capital spending to -10 percent for the year.

From the release:

“In addition to uncertainty of global economy, demand for consumer electronics such as smartphones and tablets is slowing down compared to our initial expectations at the beginning of the year. Hence the semiconductor price is falling and fab capacity utilization is declining, we expect it to take some time for the SPE market to recover.



With these trends, we are currently assuming that the scale of SPE capex this fiscal year will decline by around 10% in contrast to our initial expectation of a 10% increase.



As we enter 2012, we expect a number of factors to stimulate chip demand including Windows8, further evolution of new mobile devices such as iPhone5 and new tablets, as well as the 2012 Olympics and the US presidential election."

More detail can be found in the Management presentation here:

http://www.tel.com/eng/ir/2012/49Q1tsuneishie.pdf

The bad news about capital-spending is piling up and the stocks remain under pressure. The Applied Materials report will be the icing on the cake. After that, investors should be looking for the bottom in share prices.

Don't touch that dial!