Economic jitters threaten holiday chip cheer

CIOL Bureau
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SAN FRANCISCO, USA: Makers of chips for TVs, game consoles and other consumer electronics aren't expecting much for Christmas, but insatiable demand for high-end gadgets like Apple's iPad will likely deliver some cheer.


Texas Instruments, Intel and Qualcomm are normally busy this time of year churning out microchips for consumer electronics -- typically the hottest tickets during the annual holiday season from November to December.

But persistently high U.S. unemployment and the risk of further economic slowdown, along with the danger of a European financial crisis, have soured many manufacturers' moods, according to a growing chorus of chip executives.

Even blockbuster expectations for smartphones have cooled slightly.


"Wherever we look right now there's macroeconomic uncertainty," ARM Holdings Chief Executive Warren East told analysts on a conference call on Tuesday. "There is uncertainty about consumer expenditure."

Cambridge, England-based ARM, whose chip technology is widely used in smartphones and tablets, warned that an uptick in chip manufacturing typically seen ahead of Christmas might be smaller than normal this year.

Consumer spending cautious


"Consumer spending is cautious," said Longbow Research analyst JoAnne Feeney. "(Product manufacturers) are in a wait-and-see holding pattern. They want to see whether demand materializes before they build more televisions, set-top boxes and cameras."

Last week, Intel cut its outlook for 2011 PC shipments and said growth would come from China and other emerging markets instead of the United States or Europe.

3M Co said on Tuesday its display and graphics segment fell in the June quarter, reflecting less demand for LCD TVs and a tighter consumer electronics market.


Because many of its products are low-cost, quickly used and sold all over the world, 3M is a barometer of global industrial health.

Texas Instruments said on Monday computing and consumer electronics customers concerned about the economy were ordering fewer chips than usual for this time of year. It said store shelves could fill up later than usual this holiday shopping season.

As well as tough economic times, ripples from Japan's earthquake in March are still affecting the industry.


Electronics manufacturers that deliberately ordered extra components following the disaster are now less worried about shortages and are beginning to work through their inventories, leading to fewer new orders, said CLSA analyst Srini Pajjuri.

Consumer appetite for Apple's smartphones is as strong as ever, but growth at competitors like Nokia, Research in Motion and LG Electronics has faltered.

And a slew of tablets meant to compete with the iPad have failed to take off, adding to inventories of chips that had been manufactured in anticipation of higher sales but have gone unused.


"Demand for smartphones and tablets is OK, but it's not as good as people were thinking," said MKM Partners analyst Daniel Berenbaum. "Plus smartphones and feature phones have a big headwind in Europe, which is a very important market."

Smartphone shipments this year will grow about 38 percent, according to market research firm IHS iSuppli. Analysts earlier this year had forecast expansion of around 50 percent.

Shares of Broadcom, which makes Bluetooth and other wireless chips and counts Apple as a key customer, soared 9 percent after the Irvine, California company gave a rosier-than-expected quarterly outlook.


Some investors expect larger wireless chipmaker Qualcomm to supply key chips for Apple's next iPhone and to continue to increase its content in Apple's devices.

Qualcomm last week raised its guidance for the current quarter, although Chief Financial Officer William Keitel warned that economic uncertainty was making customers "extra judicious".

Chipmakers that do their own manufacturing, instead of contracting it out, and that have inventories on hand, may be able to respond in time to any last-minute holiday orders should the outlook for consumer demand improve.

Texas Instruments has said there is still time to ramp up ahead of the year-end shopping season and that its factories will be ready if demand improves.

"Christmas could still come if consumers indicate they're going to spend, Longbow's Feeney said.