Semis Work Through Inventories

According to the research group Gartner, the outlook for the semiconductor equipment industry is showing signs of improvement, as it appears that capital equipment spending bottomed out in the second quarter of 2009. Most semiconductor companies spent the first half of 2009 working through the high levels of inventory built up in the last six months of 2008.

Capital spending remains a major concern; it is expected to be down around 40% – 45% in 2009 and not expected to return to normal levels anytime before 2011. In fact, Gartner had earlier predicted that chip sales won't return to 2008 levels until 2013 as the industry struggle through the global downturn. The economy might show bleak signs of recovery, but the road is long and slow before demand and spending return to normalcy.

Klaus Rinnen, Managing Vice President for Gartner's Semiconductor Manufacturing Group, had earlier observed that the crisis that hit the industry in the third quarter of 2008 and fully eroded the fourth quarter, which led to a dramatic decline in capital spending. Rinnen further stated that the ongoing glut in the memory-chip market and a dramatic decline in consumer spending have resulted in the significant drop in demand.

The memory chipmakers have added so much capacity in recent years that it has led to falling chip prices. The chipmakers invested about $30 billion by way of capital expenditures for new fabs and new equipment to increase capacity. It remains to be seen if/when those investments yield results.

Chipmakers like Microchip Technologies (MCHP - Analyst Report) are reeling, as revenues continue the downtrend. In addition, margins are under pressure due to underutilization of fabs.

On the other hand, Atmel Corporation (ATML - Analyst Report), after refuting an unsolicited acquisition offer from MCHP and ON Semiconductors (ONNN - Analyst Report), is now focusing on its new maxTouch technology, which is the fastest growing technology in its microcontroller business.

Meanwhile, demand environment and near-term visibility remain challenging at LSI Corp. (LSI - Analyst Report), which designs, develops and markets high-performance semiconductors and storage systems. The results from the past two quarters have been affected by softness in end-market demand for PCs and servers and related storage products.

Inventory management has become the most important weapon to fight this slowdown, and most companies have used it rather intelligently over the past few months.