LONDON — Market forecaster Gartner has revised its forecast for chip market growth in 2006 upwards to 9.5 percent as a result of news of increased capital spending budgets for 2006. Gartner was predicting 2006 annual growth of 7.6 percent in January 2006.

Although capital spending at chip companies, set to be 10 percent more than previously expected, will have its main impact in 2007 Gartner (Stamford, Connecticut) said the worldwide semiconductor market is going to adopt a pattern of modest growth for the next few years, as a result of generally cautious investment in incremental capacity additions.

In 2005, the market grew 7 percent and Gartner said that worldwide semiconductor revenue would be $257.7 billion in 2006, a 9.5 percent increase from 2005 revenue of $235.3 billion. A mild growth slowdown is expected in 2007 with growth of 7 percent, followed by a cyclical market peak in 2008.

Gartner indicated that chip makers have learnt lessons from the years of boom and bust and would now seek to invest cautiously in manufacturing capacity to limit the build up of excess inventory in the supply chain.

Contrary to consensus expectations, Gartner’s semiconductor inventory index showed a reduction in semiconductor supply chain inventory levels in the fourth quarter of 2005.

“The supply of semiconductor devices is becoming more constrained, and the downward pressure on the average selling prices of devices seen in 2005 has eased,” said Andrew Norwood, research vice president for Gartner's semiconductor research group, in a statement. “Any lengthening of device lead-times in coming months will be seen as further evidence of a tightening market.”

“Low and declining inventory levels naturally lead to increased production to build inventories in anticipation of future demand, but in the face of elevated manufacturing capacity utilization rates, increased capital spending will be required to facilitate a rise in output,” said Norwood. “Since our last capital spending forecast in December 2005, significant increases in spending for 2006 have been announced, suggesting growth in capital expenditures of about 10 percent this year.”