Chip shortage to continue in 2000

During the past week, both Dell Computer and Gateway have issued warnings

that shortages of key components, most notably Intel microprocessors will affect

their ability to deliver product, and this will impact their current quarterly

sales and earnings. Although IC and motherboard production levels in Taiwan have

returned to pre-earthquake levels, computer and electronics manufacturers are

facing shortages in a range of key IC components for much of this year,

according to industry market researchers.

Intel, for one is having a tough time meeting demand. That is causing major

problems for companies like Dell and Gateway, whose direct sales business model

dictates that they keep minimum inventory levels, as low as a 10-day supply in

Dell's case. The situation may get worse before it gets better in the coming

months due to the launch of Microsoft's Windows 2000 which will require many

companies to upgrade their hardware with entirely new servers and workstations,

or increase system memory levels in order to prevent the huge memory requirement

of the Windows 2000 OS from lowering system performance.

Current DRAM capacity would not be sufficient to absorb a major spike in DRAM

demand, resulting in shortages in the coming quarters as memory makers

accelerate plans to build new plants and upgrade existing facilities to produce

high-capacity DRAMs. "Most of the major semiconductor manufacturers in

Japan, Korea and Europe told us this month they view the decline in this quarter

to be limited due to the launch of Windows 2000," said Hideki Wakabayashi,

senior analyst at Dresdner Kleinwort Benson in Japan.

Virtually no DRAM maker expanded capacity during the four-year slump in the

highly cyclical semiconductor industry which bottomed out in 1999. " I

think you had over-pessimism. Components are very, very tight," said Don

Floyd, head of Asia technology research at Credit Lyonnais in Taipei. "A

lot of firms here in Asia found themselves lying down because they couldn't

obtain components." Conditions in the IC foundry business are not much

better. Taiwan Semiconductor Manufacturing and United Microelectronics have

reportedly informed customers that their production lines are booked full for

months to come.