Why has the semicon equipment bubble really burst? - I

Early today, I'd mentioned about receiving an interesting report from The Information Network — where it said that the global semiconductor equipment industry bubble has burst!

It made interesting use of an analogy around “The Emperor’s New Clothes,” a short tale by Hans Christian Andersen and the global semiconductor industry. So, I got in touch with Dr. Robert N. Castellano, president of The Information Network, New Tripoli, USA, to find out more.

Just why did the bubble burst?
I started by asking him why The Information Network has been pointedly indicating that the semicon equipment bubble has burst?

He said: "If we take a look at the SEMI book-to-bill ratio, bookings were down from $1,837 million in July and $1,816 million in August to $1,616 million in September. Keep in mind that these are three-month moving averages. so that September's numbers were proped up by stronger July and August bookings.

"Additional data come from our proprietary leading indicators (PLI) that we have developed obver the past 15 years. They point to changes and inflections in the economies of the world and correlate with inflections in semiconductor equipment revenues several months out. We plot SEMI's announced billings (revenue) instead of bookings, which are anticipatory. Our PLI has been trending downward for the past three months, signalling an inflection in equipment revenues. We will see this happen this quarter."

Pitfalls of two years of growth combined into one!
The report has also indicated that year 2010 is the same as 2000 -- where two years of growth were combined into one. What are the pitfalls from such a development?

Dr. Castellano added that in 2000, equipment revenues skyrocketed, followed by a severe downturn in the following year. In a typical cycle, we see about three years of growth. But not so in 2000. The reason for the large growth was inaccurate market forecasts, when some 'analysts' kept hyping shortages in certain ICs, particularly DRAMs. This led IC manufacturers to purchase more equipment and build more fabs to meet the anticipated growth.

Little did they realize that the Dell Computers of the world were also reading the same 'erroneous' forecasts and purchasing twice the number of ICs they needed for fear of shortages.

The IC companies, not realizing the customers were double dipping, thought that the phenomenon was real and kept expanding. In 2001, IC manufacturers were left with about $10 billion in excess inventory. The year 2000 coincided with Y2K. Later that year, the Internet bubble also burst. So, growth came from anticipated applications, rather than real demand.

He said: "The same thing is happening in 2010. The world is mired in poor economic conditions, and even in a good year with healthy GDP growth, semiconductor growth of 30-50 percent is almost unheard of.

"And, for 2010, in which equipment purchases were meant for technology advancements to the next node, and not for capacity increases because of demand by consumers for new gadgets, growth of 100 percent in the equipment sector was virtually impossible with purchases made in a sane process.

"However, when the forecasts coming out of SEMI and other 'analysts' pointed to hyper growth, IC manufacturers, probably for fear of not being able to secure 'minimally needed' equipment, placed orders. The problem was compounded with companies such as Samsung, that went all out and practically locked in the supply of ASML’s immersion tools. Other memory manufacturers placed orders for fear of not getting any. We warned months ago that growth in DRAMs over 100 percent was not sustainable. Sure enough, Nanya and Inotera both reported losses for 3Q10."

The emperor's new clothes
There's this interesting analogy about 'The Emperor has new clothes' with the semicon industry.

Dr. Castellano elaborated that in this scenario, they see the Emperor as the executives of the DRAM manufacturers. The rest of the cast remains the same – tailors are 'analysts' and the child is The Information Network that warned the Emperor of problems with no success.

Here, the citizens are the mainstream press. They continue to publish forecasts from these 'analysts' and never call them to the carpet about their results or how they seem to change monthly.

Well, as a member of the technology press, I have tried my best, and sincerely. I really don't know with how much success, but I do try and call or email each analyst, seeking more insights, which are covered in my posts.

Industry overlooking repeated warnings?
How can the industry afford to not overlook repeated warnings? This is peculiar!

According to Dr. Castellano, certain 'analysts' -- right or wrong, get covered in all press releases. They are referenced by semis and equipment manufacturers as a matter of fact.

He gave an example: "Several years ago, I spoke with someone I knew in the PR department of Applied Materials. They had just published a release and quoted numbers from Dataquest. I mentioned to her that the numbers were not correct, and she owed it to her readers and investors the correct numbers. She admitted my lower numbers matched their internally derived numbers. Some months later, Applied issued another release with the same inflated numbers. I called her and she said the IR department told her that, right or wrong, she had to put a Dataquest forecast in the release.

"This is the problem in the industry. And companies get bigger because of the support, which exasperates the problem. SEMI always partners with Dataquest at ISS and Semicons. It can’t be changed."

I'll add more in a second part a bit later.