Gartner: semiconductor capital spending returns to positive growth in 2003.

After two years of negative growth, worldwide semiconductor capital spending and wafer fab equipment spending will return to double-digit growth in 2003, according to Dataquest Inc., a unit of Gartner, Inc. (NYSE:IT and ITB).

Worldwide semiconductor capital spending is projected to grow 15 percent in 2003 to $32 billion, up from $27.8 billion in 2002. Worldwide wafer fab equipment spending is expected to total $18.5 billion, a 16 percent increase from 2002 revenue of $15.9 billion.

"Spending will be driven by a continued need for advanced technology to keep innovation going and manufacturing costs down, and a renewed need for more capacity," said Klaus Rinnen, chief analyst and director of Gartner Dataquest's semiconductor manufacturing group. "Fab utilization worldwide has been improving since the end of 2001. Leading-edge capacity exceeded 90 percent periodically during 2002 and future improvements in end-user demand will map quickly into further capacity needs."

The leading-edge utilization rate is the primary trigger for capacity spending. There is much less capacity available at the leading-edge process technologies, so small increases in demand will have a large effect on utilization.

"Many of the new designs from fabless semiconductor companies and IDMs will go into production of these technologies during 2003. As demand increases, foundries will expand capacity in an attempt to stay ahead, while at the same time, avoid overspending and driving down utilization to unprofitable levels," said Rinnen. "Because the foundries are sitting on unfilled fabs, and equipment lead times are relatively short, capacity can be increased very quickly when demand growth resumes."

New fab activity remained slow in 2002, as lack of demand and overcapacity in the fabs kept the need for new equipment down and focused on technology.

"Technology buys for leading-edge devices have been the key drivers for equipment purchases during 2002 and into 2003. Implementations of technologies associated with copper and 193 nm deep-UV were the bright spots for new equipment purchases in 2002, and will continue to be focal points in 2003," Rinnen said.

Gartner Dataquest analysts said that in 2003 the industry needs continued strength in consumer and governmental spending as a foundation for growth, but a corporate spending return is a must to drive demand improvements.

"While there is an absence of a driving killer application and a catalyst to incite an end-user spending spree, the temporal expanse of depressed spending is creating pent-up demand," said Rinnen. "Spending will be more at corporations' discretion, but there are competitive elements that could exert pressure on corporations once the wave starts."

Additional information is available in the Gartner Dataquest Alert "Positive Outlook for Wafer Fab Equipment Market in 2003." This report examines current market conditions, as well as the new drivers and inhibitors for the industry going into 2003.