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MODEST CUTS. Another area of relative strength is memory chipmakers, particularly in Korea and Taiwan. Samsung, by far the region's largest memory chipmaker, announced plans to increase capital spending on its semiconductor operations in 2003 by 90%, to $3.56 billion. Samsung has benefited from a strong flash-memory market, as well as its vault from ninth place in that market in 2001 to second in 2002.
Offsetting these areas of growth, however, will likely be the Taiwanese foundries and large U.S. integrated device manufacturers (IDMs) such as Intel. After spending more than $18 billion on capital expansion from 2000 to 2002, Intel plans to cut capital expansion by about 20% this year, to a range of $3.5 billion to $3.9 billion. (Intel reaffirmed its 2003 spending forecast on its Mar. 6 mid-quarter update.)
Other large U.S. IDMs, including IBM (IBM ), Texas Instruments (TXN ), Advanced Micro Devices (AMD ), and Motorola (MOT ), plan modest cuts to capital expansion in 2003. With profits sagging, many of these companies are moving to reduce fixed costs by relying more on semiconductor foundries, or contract chipmakers, for future production.
UPWARD REVISIONS? The foundries, which have seen their utilization rates dip to about 60% in the fourth quarter from the low 80% range in the second quarter, also plan to cut capital spending. Taiwan Semiconductor (TSM ), the world's largest foundry, plans to cut spending by 10% to 30% in 2003, to a range of $1.1 billion to $1.5 billion. No. 2 foundry United Microelectronics (UMC ) plans to cut spending by 38%, to $500 million, for the year.
Should the computer, communications, and consumer markets -- where the foundries are strongest -- improve significantly during the year, these budgets could be revised upward. However, given current economic and geopolitical risks, we don't expect this to occur.
It's important to keep in mind that semiconductor equipment companies are at the bottom of a very large food chain. It starts with electronics products sold to corporations and consumers, goes down to electronics parts distributors and semiconductor manufacturers, and ends with capital equipment makers. Cutbacks that occur at the top of the food chain are often magnified as they make their way down it. For example, as electronics products makers respond to slowdowns in their end markets by reducing chip inventories and cutting orders, chipmakers experience overcapacity and declining profits, resulting in even larger cutbacks in spending on capital equipment.
JUST PLAIN CAUTIOUS. While 5% to 10% capital-spending growth this year -- if it happens -- would be a change for the better, strong future growth depends mainly on a pickup in corporate IT spending. So the bottom line is: Until global corporations envision a solid return to profitability and feel confident that the political environment is likely to support economic growth, current overcapacity in electronics and semiconductor markets will prevail, and capital- equipment orders will remain weak.
For 2003, execs at many chip and equipment manufacturers say they're "cautiously optimistic" -- a phrase, by the way, that they also widely used at the beginning of 2002. We, however, prefer to just use the word "cautious" when describing the industry outlook for 2003. Given stock valuations that are generally well above levels historically seen at cyclical troughs, we remain negative on the semiconductor equipment group.
Analyst Tortoriello follows chip equipment stocks for Standard & Poor's Edited by Karyn McCormack
Any advice, analysis, or recommendations contained in articles labeled "Insight from Standard & Poor's" reflect the views of Standard & Poor's, which operates separately from and independently of BusinessWeek Online. It is possible that BWOL may from time to time publish information that is not consistent with advice, analysis, or recommendations that are published by Standard & Poor's. Standard & Poor's and BusinessWeek Online are each units of The McGraw-Hill Companies, Inc.
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