Semiconductor buyers should keep a watchful eye on the capital expenditure plans of their key chip suppliers. The semiconductor industry will experience its second consecutive year of declining sales revenue in 2016, which will mean some chipmakers may lack the capital to invest in new fabs, or to expand and upgrade existing facilities.
While a slower rate of investment will not impact supply immediately, it could result in tighter supply, higher prices, and longer lead times in the future because while revenue growth is declining, unit demand for semiconductors continues to rise, according to researchers. Without investment in new capacity, chip demand will eventually surpass supply, resulting in shortages and higher prices.
When semiconductor companies have banner sales years, they often increase capital expenditures and invest in new capacity, hoping to gain market share from competitors. After a period of strong sales growth, chip companies often build new fabs or expand and enhance older ones. They may invest in new equipment to handle larger-size wafers or transition to new process technology, which results in greater semiconductor output.
Conversely, when sales decline, chipmakers cut back on capital expenditure plans and hold off on increasing capacity because doing so would boost supply and reduce prices. Reduction in capital investment is the likely scenario over the next year.
World Semiconductor Trade Statistics (WSTS), which keeps track of global semiconductor sales, recently updated its forecast and said chip sales will decline 2.4% to $327 billion in 2016 from $335.2 billion in 2015 when sales dropped 0.2% from the previous year. WSTS had earlier forecast that semiconductor revenue would rise 0.3 percent to $347 billion in 2016.
A weak DRAM market is a “major culprit” to overall declining semiconductor revenue, according to researcher IC insights. In 2015, DRAM sales totaled $45 billion, making DRAM the single biggest product category in the semiconductor industry, the researcher said. In 2016, the DRAM market will decline 19% to $36.5 billion.
“The DRAM market alone is forecast to shave three percentage points off of total semiconductor market growth this year,” says Brian Matas, vice president of market researcher for IC Insights.
The decline in DRAM sales revenue is largely due to a drop in the average selling price for the memory IC. The average price for DRAM is expected to drop 16% to $2.55 in 2016, the researcher said. The flash memory average price will fall 13%, including a 23% decline in the NOR flash segment, while the NAND average price will drop 7%.
Prices are not just declining for memory ICs. The average price for 4- and 8-bit microcontrollers will drop 12%, while the price for application-specific analog chips for wired communications will drop 14%. The average price for industrial application-specific analog ICs is forecast to fall 15%, and special purpose logic for wired communications price will decline 12%, according to IC insights.
Falling prices and less overall revenue will mean some chipmakers will cut back on capital expenditures. For instance, DRAM capex is forecast to decline 19% to $8.7 billion. In 2015, DRAM manufacturers increased capex 36%, the researcher said.
Total capital expenditures by semiconductor companies will fall 2% in 2016, according to researcher Gartner Inc. Spending on wafer-level manufacturing equipment and wafer fab equipment will drop 1.8% and 2% respectively, while spending for wafer-level packaging and assembly equipment will rise 2.1%, Gartner said. Excess inventory and weak demand for PCs, tablets, and mobile products are to blame for the declines, according to the researcher.
Weak or declining capex would not be a problem for buyers if unit shipments for semiconductors also declined, but they aren’t. Chip demand continues to rise. Unit shipments of integrated circuits increased 5% in 2016 and are forecast to increase 4% in 2016 and 2017, IC insights said.
Most analysts say that there is enough chip capacity to meet rising demand in 2016 and early 2017. But with chip sales and capital expenditures expected to decline, it behooves buyers to check out the capex plans for their strategic semiconductor suppliers to ensure they have enough capacity in place to meet potential upsurges in demand next year and 2018.