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  • The Disconnect Between Semiconductor and Semiconductor Equipment Revenues

    Historically, the semiconductor and semiconductor equipment industry were inextricably linked due to the cyclical nature of the chip industry. An increase in semiconductor revenues was followed within a short period with an increase in equipment revenues, as semiconductor companies purchased equipment to make more chips to increase capacity. In down years, semiconductor companies stopped purchasing unneeded equipment.

    Chart 1 illustrates the cyclical nature of the industry between January 1991 and the end of December 2010.

    Article: Building Energy-Efficient ICs from the Ground Up-semiconductor-chart-1.jpg

    Chart 1

    Chart 2 shows that since 2011, this link between semiconductor and equipment revenues has been broken. Semiconductor revenues (red line) have continued to increase unabated, while equipment revenues (blue line) have begun a steep drop since June 2018.

    Article: Building Energy-Efficient ICs from the Ground Up-semiconductor-chart-2.jpg

    Chart 2

    If we compare Chart 1 with Chart 2 and focus on the trendlines, between 1991 and 2010 (Chart 1), semiconductor revenues growth was significantly more positive than equipment revenues. However, between January growth between the two sectors has been nearly identical, despite the cessation of the concurrent peaks and valleys of a cycles. This suggests that the semiconductor and equipment industry, although still cyclical, are independent of each other.

    This presents a conundrum for analysts, including myself. The disconnect between semiconductor equipment capex spend by semiconductor companies presents a challenge in forecasting equipment growth based on semiconductor growth - something Iíve been done since I started The Information Network in 1985.

    As seen in Chart 2, both semiconductor and equipment revenues rocketed starting in 2017. According to WSTS, the semiconductor consortium, memory chip revenues grew 61.5% in 2017 compared to just 21.6% for the entire semiconductor industry. In 2018, the memory chip revenues are projected to grow 30.5% compared to 15.7% for the entire semiconductor industry. However, memory chip revenues are projected to grow just 4.6% compared to 5.2% for the entire semiconductor industry in 2019.

    NAND companies are migrating technology to 96-layer 3D NAND chips. For DRAMs, Samsung Electronics is currently migrating to the 1ynm process, while SK Hynix and Micron are switching to the 1xnm process

    These transitions are proving difficult to achieve with high yields. Also, these migrations increase the number of processing steps used to make the chip, resulting in what is termed a "natural decline" in wafer throughput. In general, movement from one node to the next results in a 5-10% decline in capacity.

    To counteract this "natural decline," capacity needs to be increased, which is achieved by building new fabs and lines and purchasing equipment. Thus, the 60% increase in equipment purchases exhibited in 2017 did not result in comparable increases in unit shipments (Chart 3) but it did result in an increase in bit growth (Chart 4).

    Article: Building Energy-Efficient ICs from the Ground Up-semiconductor-chart-3.jpg

    Chart 3

    Article: Building Energy-Efficient ICs from the Ground Up-semiconductor-chart-4.jpg

    Chart 4

    We are now witnessing a slowdown in equipment revenues. One reason for the slowdown in memory revenues is a drop in NAND and DRAM ASPs. This has prompted memory companies Samsung Electronics and SK Hynix to push out and delay further capex spend.

    Companies such as Applied Materials and Lam Research, with a large exposure to memory chips through deposition and etch tools utilized in NAND production, should experience long term headwinds that will last until 2020.