Gartner: Chip Spending Will Fall 25 Percent as Financial Crisis Continues

In a survey of what Intel, AMD, Samsung and the rest of the chip industry will spend on processor manufacturing, Gartner found that capital spending will decline 25 percent in 2008 and drop further in 2009. The drop in spending is related to oversupply of DRAM and NAND flash memory but also relates back to the ongoing financial crisis, which is leading to less consumer spending. The picture should become clearer when Intel and AMD report third-quarter financial earnings later in October.

The ongoing Wall Street financial crisis, along with an oversupply of DRAM (dynamic RAM) and NAND flash memory, is likely to slash what the semiconductor industry spends on manufacturing and other capital expenditures by 25 percent in 2008, according to a new survey by Gartner.

In 2008, the semiconductor industry, which includes Intel, Advanced Micro Devices and Samsung, among others, will spend about $41 billion on capital expenses and manufacturing. That is about a 25-percent decline from 2007, and capital spending is expected to decline another 12 percent in 2009.

Chip spending will finally rebound in 2010, when spending is set to increase about 16 percent, according to Gartner's Oct. 8 report. However, spending will total about $48 billion in 2010, which brings the total amount of capital spending back to the level the industry is seeing this year.

The semiconductor industry still stands as an important bellwether of the entire IT industry since a host of products, from desktops and notebooks to server systems and storage arrays, all use processors in some form. If OEMs, such as Dell, Hewlett-Packard, IBM and Sun Microsystems, are cutting back on manufacturing products, it means that chip makers will have less to spend in the coming two years.

The Wall Street financial crisis has also reduced consumer confidence and spending, which in the past several years has helped propel a range of new gadgets into the market place-mobile devices, cell phones, notebooks-that required chips and allowed the semiconductor industry to grow and invest more in manufacturing and technology research.

The building and maintaining of manufacturing facilities-fabs-and the investment in new technology to improve processor performance is also a major expense for semiconductor companies. That seems why many companies, from Samsung to Texas Instruments and now AMD, are trying to reduce capital expenses by eliminating facilities and going fabless. Gartner believes foundry spending will decrease about 29 percent in 2008.

Gartner is looking for more consolidations and mergers in the semiconductor industry during the next two years, which should help cut expenses as companies begin to share expenses. "The semiconductor industry needs to prepare for a prolonged downturn while the device manufacturers adjust supply to meet slowing demand," according to the Gartner report.

In addition to these concerns, the entire semiconductor industry is still suffering from excessive memory inventory. This glut of supply means that prices for NAND flash memory and DRAM will continue to drop. The Gartner report found that the industry will reduce its overall spending on memory by 36 percent during 2008, with DRAM spending dropping 44 percent and NAND memory falling 23 percent.

The entire IT industry should have a better picture of how the credit crunch and the financial crisis on Wall Street is impacting spending when Intel and AMD announce their third-quarter financial results during the week of Oct. 13.