Capital expenditures plummeted by 29%, semiconductor equipment manufacturers had a tough 2019

Source: The content comes from "ZhiTong Finance", thank you.

The semiconductor equipment market grew 37.3% in 2017 as memory product manufacturers increased capital spending to increase binary capacity and move to more sophisticated nanometer products. Unfortunately, these companies overspent, leading to an oversupply of memory chips.

As memory prices began to fall, these companies cut capital spending, resulting in global semiconductor equipment revenue growth of only 13.9% in 2018. Inventories will continue to rise in 2019, and capital spending is expected to decrease by 29%, which will lead to a significant decline in semiconductor equipment revenue in 2019.

Therefore, The Information Network 's report "Global Semiconductor Equipment: Markets, Market Shares, and Market Forecasts" shows that the overall revenue of the global semiconductor equipment market may fall by 17% to US$64.5 million in 2019.

In order to analyze the equipment market in 2019, Zhitong Finance APP analyzed the industry revenue and market share of major suppliers in previous years and further explored future trends.

In 2018, Applied Materials (AMAT.US)'s market share dropped to 18.8% from 21.2% in 2017, as shown in Figure 1. The market share of US supplier Lam Research (LRCX.US) was 16.8% in 2018, down 0.1 percentage point from 16.9% in 2017.

In the deposition and etch space, Applied Materials and Lam Research’s main competitor is Japanese supplier Tokyo Electron Ltd., which held 16.7% of the market in 2018, up 1.6 percentage points from 15.1% in 2017.

Figure 2 shows the year-over-year change in revenue for the leading semiconductor equipment companies. As mentioned above, the overall market grew by 13.9%, so Lam Research's 13.7% growth is attributed to a loss of 0.1 percentage point in market share. Applied Materials' lackluster growth in 2018, at 1.1%, was lower than the combined growth of companies ranked 8 to 75, causing its stock price to fall by 1.6 percentage points. The company has lost market share to competitors over the past three years.

KLAC Semiconductor (KLAC.US) grew 26.1%. Some analysts pointed out that the company is further turning to wafer inspection.

The process equipment sold by Applied Materials covers almost the entire semiconductor chip manufacturing industry chain, including two major parts: deposition and etching. From 2015 to 2017, 46% of Applied Materials' revenue came from deposition, 18% from etching, and 10% from deposition.

-20% came from the etching segment, which accounts for two-thirds of the company's total revenue.

The deposition market grew 3.9% and the etch market grew 4.4% in 2018. As Applied Materials’ total revenue grew only 1.1%, it’s clear that the company lost market share in both areas to competitors, namely Lam Research, Tokyo Electron, and Hitachi High-Tech.

Based on the capital expenditure data shown in Table 1, Information Network predicts that the semiconductor equipment market revenue will increase by 13.9% in 2018, but the growth will decrease by 17% in 2019.

Figure 3 shows the billings for North American equipment suppliers from 2015 to February 2019. The red arrows indicate the billings for 2019. In the first two months, the 2019 billings appeared to follow a seasonal trend, similar to 2015 and 2016, but down 21.5% year-over-year from 2018.

Figure 4 shows the revenue billings of Japanese equipment suppliers during the same period. The red arrow highlights that the billing data in 2019 did not show seasonality. Unlike North American companies, the billing data in 2018 only fell by 4.5%.

To better differentiate between North American and Japanese device companies, Figure 5 shows the trailing 14 months of billings data between January 2018 and February 2019.

For North American companies, we can see an increase in billings in the second quarter, followed by a sequential decline. There was another increase in December 2018, but this was due to a contraction in revenues by companies to increase revenues before the end of the calendar year. As shown in Figure 3, this increase occurred in December every year for the four years shown in the chart.

Looking at Japanese companies, on the other hand, there were double peaks in the second and fourth quarters of 2018, which caused Japanese companies to surpass North American companies in market share. Revenues are expected to increase in March (similar to the increase in revenues for North American companies in December) because Japan's fiscal year ends in March - so we can see an increase in March every year, as shown in Figure 4.

In 2018, the U.S. dollar appreciated by only 1.5% against the Japanese yen compared to 2017, so the exchange rate is not a factor in the significant revenue difference between North American semiconductor equipment companies and Japanese semiconductor equipment companies.

Moreover, the customer base is not very important here. For example, Tokyo Electron's revenue from South Korea was 37% in the first quarter of 2018, but fell to 25% in the fourth quarter of 2018, as memory suppliers Samsung Electronics and Hynix cut capital expenditures. Lam Research's revenue from South Korea was 36% and 25% respectively in the same period.

While there is no strong evidence that Japanese equipment companies achieved significant growth compared to North American companies in 2018, it is certain that 2019 will be a recession, with revenues down 17% year-on-year.

The main reason is a drop in capital spending by memory companies, which is related to excess inventory and an oversupply of 3D NAND and DRAM chips. All in all, capital spending is expected to fall 29.1% in 2019.

But investors also need to consider another important factor: the increase or decrease in market share. Why is market share so important? Semiconductor manufacturers purchase equipment based on the "single advantage" strategy. If market share is lost, it means that the equipment does not have a "single advantage". When a customer decides to buy additional equipment to increase production capacity, he will buy more equipment from the current supplier. This means further expanding market share.

*The content of the article represents the author’s personal opinion and does not represent Semiconductor Industry Observer’s agreement or support for that opinion.

Today is the 1898th issue of content shared by "Semiconductor Industry Observer" for you, welcome to follow.