After slump, wafer demand will show strong growth until 2005

It certainly isn't "new" news: semiconductor wafer demand will be down significantly in 2001. Demand for processed silicon will drop 23% from 87.9 million eight-inch equivalent wafers in 2000 to just 67.5 million this year, according to new estimates by Semico Research. But the good news for chip manufacturers and wafer fab managers is that there will be strong growth throughout 2004.

Overall, Semico is predicting 21% and 18% increases in wafer demand for 2002 and 2003, respectively. Even 2004 will show a healthy increase in wafer demand of 23%. However, the three good years will be followed by a slow growth year in 2005, when wafer demand will increase by just 4% to around 121.6 million eight-inch equivalent wafers from the prior year.

A decline in wafer demand is not necessarily indicative of, or proportional to, a decline in semiconductor revenues. In many cases, wafer demand will decline due to technological advances, such as die shrinks and better yield. However, in 2001 and 2005 the decline in wafer demand coincides with a drop in semiconductor revenues. Much of the wafer increase over the next few years will be due to the introduction of more complex products (system-on-chip devices) using more advanced process technologies (0.10-micron line widths) on new materials (300-mm wafers).

Recently, Semico took a closer look at wafer demand by product and by company. From 2000 to 2005 wafer demand within several product categories will show significant change. Flash memories will increase in popularity, decreasing the demand for other nonvolatile memory chips, such as electrically erasable programmable memory (EEPROM). Microcontrollers (MCUs) and digital signal processors (DSPs) will grow in popularity due to the increasing complexity of embedded systems designs and other applications, which require more interactions with real-world data.

This all leads to a change in wafer demand by each company. Suppliers focusing on flash, DSPs and MCUs will increase their wafer use at a faster rate than other companies. The companies that process the most wafers will change positions slightly over the next five years. Texas Instruments Inc., for example, is expected to show the biggest increase in wafer demand in this timeframe, due primarily to TI's heavy investment in DSP production.

Integrated circuits continue to grow in complexity and shrink in process geometries. In 2000, 61% of all processed wafers utilized a 0.35-micron or larger feature size process technology. In 2005, 66% of the industry's wafers will be fabricated with 0.25- to 0.10-micron process technologies.

Where does foundry demand fit into this picture? Foundry demand suffered a significant decline in 2001, more than the overall semiconductor industry. But due to capital expenditures and increased product activities in microperipherals and other logic segments, Semico expects more outsourcing of processed wafers in the coming years. Details about the foundry growth outlook will be released in January.

Nancy Winters is a research analyst with Semico Research Corp. in Phoenix.

(See last month's commentary on foundry trends.)