Chip industry spending on upswing, report says

The chip industry has been pouring money into capital spending this year but the trend won't last forever, according to Gartner.

The chip industry has been pouring money into capital spending this year but the trend won't last forever, according to a new report from market researcher Gartner.

Global spending on semiconductor capital will reach US$44.8 billion this year, a 51 percent jump over 2003, Gartner said. And worldwide spending on capital equipment in the industry is projected to surge 64 percent to US$37.3 billion this year.

Those figures tower over the growth seen in 2003. Last year, chip capital spending grew just 8 percent and capital equipment spending increased 10 percent.

"The surge in new equipment sales in 2004 is a direct result of demand visibility and capacity tightness," Klaus Rinnen, vice president of chip and design research at Gartner, said in a statement.

Spending in specific segments of the industry, such as wafer fabrication equipment, packaging and assembly machines, and automated testing gear, are projected to increase by more than 63 percent each this year, Gartner said.

Wafer fabrication plants reached 94 percent capacity at the end of the second quarter, Gartner said.

"The industry needs more capacity to continue meeting increased device demand, and the industry is finally reacting to the need with a degree of urgency," Rinnen said.

Rinnen did say, however, that the spending surge won't last.

"Now that capacity increases are keeping pace with unit demand, equipment orders are slowing. It seems the industry is attempting to more closely match its supply and demand ramps to maximize much-needed profits," he said.

Gartner predicts that spending on chip capital will grow 13 percent in 2005 before shrinking 15 percent in 2006 and 17 percent in 2007. Gartner sees a recovery in 2008 with growth of 12 percent.

The same trend will occur in capital equipment spending. Gartner expects 15 percent growth in 2005, followed by a contraction of 18 percent in 2006 and 21 percent in 2007. In 2008, Gartner predicts, growth will return with a spending increase of 17 percent.

The chip gear industry as well as the chip industry follows a cyclical path. As demand for chips grows, chipmakers buy equipment. But once the demand is met, these plants become surplus.

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