The ‘tea leaves’ reveal an impending capacity shortage

It's something he refers to as 'reading the tea leaves'. With an industry driven by what he calls 'deterministic chaos', picking the right numbers can often be a matter of luck. "But getting the underlying trends right is not a matter of luck," he adds. Future Horizons has just held its mid term forecast seminar, updating its predictions for the semiconductor business in 2009 made earlier this year. One of the items which most worries Penn is investment in capacity – a theme which he highlighted in a similar seminar in 2008. Then, he noted that 'capacity is king'. In the 2008 mid term seminar, Penn claimed investment in new fab equipment – at 15% of revenues – was at 'its lowest point ever', with the potential for a capacity shortage in 2009. While that problem may have been headed off by global economic problems, Penn remains worried, because his research appears to show that capital spending is now even lower. And this bodes ill for the industry. "Shortages, allocation and price rises are on the horizon," he claimed. "Get your supply needs tied down now." He also realises this situation cannot continue and that, probably sooner rather than later, there will need to be investment in new fabs and equipment. "The question now," he said, "is whether the equipment industry will be able to respond to this inevitable increase in demand?" He forecasts that capital spending on manufacturing equipment may need to triple in 2010 in order to meet demand. Many equipment companies laid off large numbers of staff during the last year, which means getting the pipeline flowing again could be problematic. Reading the 'tea leaves', Penn believes that semiconductor sales in 2010 could rise by 15% over this year's level, based on the momentum provided by the recovery. In 2011, however, sales could be 28% up on 2010 as the industry reaches the top of what Penn sees as a 'cyclical boom'. He then expects a correction phase, with sales slowing in 2012 and possibly showing negative growth in 2013. For the meantime, Penn says: "If, or rather, when fab capacity gets tight, average selling prices will explode and it will be better to pay five times the price and get delivery."