Applied worries 'phase 2' in downturn could delay 300-mm fabs

SAN FRANCISCO -- Applied Materials Inc. today again lowered its forecast for worldwide semiconductor equipment purchases, and its chief financial officer cautioned financial analysts that the industry's sharp slump is still showing signs of slowing in a "second phase" of capital spending cuts.

While chip makers continue to whittle down their plant investments this year, Applied CFO Joseph R. Bronson said 300-mm wafer fab budgets are mostly being spared the budget ax--so far. However, Bronson said he worried that a prolonged downturn and continuation of low semiconductor profits could cause some chip makers to push-out or cancel major 300-mm projects.

"We haven't seen it yet but if customers continue to have poor profitability, it could happen down the road," he said during a briefing prior to the opening of the Semicon West trade show in San Francisco today.

Currently Applied is forecasting that 300-mm tool demand in 2001 represents about 25% of customer "technology purchases"--meaning frontends aimed mostly at R&D and pilot production of new processes. Only 10% of tool purchases this year now appear to be going to adding chip-processing capacity, Bronson said. About 65% of the tool orders are for "technology buys" in 200-mm fabs for development and pilot line production, he said.

Applied now estimates that worldwide chip-processing tool purchases will fall 30% in the industry this year from $33 billion. Overall, capital spending by semiconductor manufacturers will drop 27% while chip revenues will be down 23%, based on new estimates, Bronson said.

The CFO noted that nearly all forecasts for industry capital spending and fab tool purchases have continued to drop each month. He said the overall technology sector now has fallen behind other industry sectors with no clear driver in information technology markets. Foundries are suffering through their worst recession ever, he said, and DRAM market have experienced an unexpected wave of additional price erosions. All this is setting up the second phase of the downturn, Bronson added.

This has put at risk the momentum of the 300-mm movement, which was delayed three years ago by the last semiconductor downturn in 1998. But so far, multi-billion dollar plant projects appear to be moving forward as many major chip makers gamble that new 12-inch diameter wafers will be needed and fabs ready when business picks up again. Many device manufacturers are also facing pressure to work out their 300-mm strategies, tool sets, and processes in time to leverage larger substrates for lower costs in the middle of this decade, according to analysts.

Currently, Applied believes 15 fabs will be in volume production with 300-mm wafers by 2003, Bronson said. Nine R&D and pilot fabs will also be operational in 2003, according to Applied's current outlook. If those projections hold up, about $16 billion will be spent for 300-mm fabs in 2003.

But this downturn could start to erode or push out some of these projects, if some sign of a bottom or recovery is not soon on the horizon, suggested Bronson. He added that it still is unclear if any 300-mm would be delayed, but the risk is increasing. He also said it was unclear if the industry has reach a "bottom."

"We are trembling along. I don't see a change... it is hard to say if we have or haven't reached a bottom," he said in response to an analyst's question.

In 2001, about $10.2 billion will be spent on 300-mm fabs, according to Applied's current forecast.

About $3.5 billion in 300-mm tools will be shipped to sites in North America, and another $3.5 billion will go to the Asia Pacific region this year, Bronson said. Japan will represent $1.3 billion in 300-mm tool shipments, and Europe will account for $1.9 billion, he said.

For Applied, the recovery and continuation of 300-mm projects are crucial. Bronson estimated that the Santa Clara, Calif.-based equipment giant has gained significant market share in tool sets for 300-mm vs. 200-mm fabs. The company now claims it has 58% market share in 300-mm vs. 25% in all of the equipment segments in 2000.