Semiconductor industry: Are the chips really down?

Duncan Martell

SAN FRANCISCO: Everyone in the boom-and-bust semiconductor industry knows

it's in one of its worst-ever slumps, but industry chieftains and analysts are

divided over the questions of just how bad the downturn is and how long it will

last.

With earnings-profit-warning season coming to a close and so-called ‘earnings’

season getting under way, investors would soon have an idea of just how much

faith is still out there that the personal computer and chip industries will see

some sort of rebound in the second half.

The reasoning, at least among some executives and analysts goes something

like this: Either, it's never been this bad before, so it can't get any worse

and that means it'll get better. The other side of the coin is: It's never been

this bad, but that doesn't mean it can't get even worse and if that happens,

it's going to take a lot longer than most think for the chip industry to bounce

back.

"It's hard for me to believe that we are not at or near the

bottom," chip equipment maker Lam Research Corp chairman James Bagley said

on a Wednesday conference call to discuss its quarterly results. "It may

not improve very dramatically, but I have a hard time believing that it's going

to continue to decline."

Worst-ever chip slump?

The current downturn - which could well be the worst since 1986, when chip

sales tumbled 17 per cent - springs from a slowing US economy, customers such as

Cisco Systems Inc. over-ordering semiconductors and, to a lesser extent, the

ongoing dotcom implosion.

The No 1 chipmaker Intel Corp., for example, warned Jan 16 that first-quarter

sales would likely fall 15 per cent, roughly triple the average decline, from

the $8.70 billion it had in the fourth quarter. "We believe it took nine to

12 months to create this supply/demand imbalance and that it will take a minimum

of another six to nine months to hit bottom," wrote Lehman Bros.

semiconductor analyst Dan Niles earlier this week in a grim note to clients.

Niles added that even though in terms of comparisons, the industry could hit

bottom in August for chip revenues, low demand could quite possibly persist for

several more quarters depending on economic conditions.

But bad may spell good

But in a twist on the bad news, Salomon Smith Barney analyst Jonathan Joseph

argued in a note on Wednesday that, it's because the industry is in such bad

shape that it has a hit a bottom. He wrote that industry order rates peaked nine

months ago and would likely hit bottom in July before starting to improve in the

second half of 2001.

"We are upgrading the semiconductor sector from 'neutral' to

'outperform' based upon anecdotal order and shipment data that is so bad it

cannot continue for long and sector data that suggests a fundamental bottom is

only months away," he wrote. The bad news was actually good news, Joseph

argued, because it meant that excess capacity was in the final stages of being

wrung out of the global industry, setting the stage for a new cycle of growth.

The last pronounced downturn in the semiconductor industry came in 1996 and

was the result of the Asian economic crisis and this one, Niles argued, portends

to be far worse. In 1996, only the personal computer industry was hurt while

wireless and networking industries lunged ahead with strong growth. The US

economy was also expanding at a rapid clip at the time.

Virtually every area of the semiconductor industry - from PCs to wireless to

networking - is slowing, initially hampered by overcapacity and now damped by

the slowing US economy. Moreover, executives have said they see signs of the

slowness spreading to certain Asian markets and parts of Europe.

Worst part of the downturn

WR Hambrecht analyst Jim Liang, believes that after three very rough

quarters, the chip industry could start seeing some sequential sales growth

again in the September quarter. Of course, much of the argument that demand will

still pick up in the second half depends, analysts said, on aggressive interest

rate cuts by the US Federal Reserve and an avoidance of the United States

dipping into recession.

And even if the country does slip into recession, investors can always seek

solace in one of Intel chairman and business icon Andy Grove's more well-known

remarks: "The one thing about recessions is that they always end." But

it just won't be a fun wait.

(C) Reuters Limited 2001.