Investing For The Next Downturn?

Although the semiconductor industry cycles are difficult to predict, one thing always rings true, over-investment creates over-capacity, lower prices and usually sluggish or declining semiconductor revenues.

The stage is being set. Two weeks ago, Samsung announced its biggest ever semiconductor capital expenditure budget, some say the biggest the industry has ever experienced from one company. A majority of the approximately $10 billion total of Samsung's 2010 semiconductor spending will be on capacity expansion for memory products.

This week, GLOBALFOUNDRIES, backed by its major shareholder ATIC, announced an additional $3 billion dollars in capital expansion projects, on top of the $6 billion already announced. Other companies have also announced larger capex projections for 2010.  Total industry capital investment in 2010 could exceed total investments made in 2000. 

During the past three years the industry has curtailed capital expenditures, which Semico believes helped to dampen the effects of the last downturn. But are we now walking into the same trap?

One could argue that the capex is more highly concentrated to fewer players. One could also say that advanced technology production is more expensive these days. However, these capacity additions are expected to come online right during the next slowdown that Semico has predicted. Coincidence?

Joanne Itow
Managing Director