Global chip industry to tread water in 2002

Duncan Martell

SAN FRANCISCO: The boom-and-bust semiconductor industry, closing out its

worst year in decades, will at best tread water in 2002, analysts say -- bad

news for investors who've pushed chip stocks higher on recovery hopes. The

industry, which tends to run in up-and-down cycles of about four years,

traditionally has rebounded from downturns quickly.

But that may not be the case this time, analysts, market research firms and

industry groups say. Analysts predict that growth won't resume in earnest until

late next year at the soonest.

While the industry remains mired in downturn, stock market investors have

boosted the semiconductor stocks by 50 per cent or more from their October lows

on hopes for a recovery. But analysts say that there are no signs of a big

rebound anytime soon.

"The best we can do in 2002, I believe, is for it to be a flat

year," said Needham & Co. semiconductor analyst Dan Scovel, adding that

he expects industry sales to decline by as much as 5 per cent. "And the

first signs of real life won't likely come until the second half of next

year."

Global chip sales first began to decline on a month-over-month basis last

fall. The industry saw sequentially declining revenues in each month from

November 2000 to September of this year, plagued by a slowing US economy that

gave way to a recession earlier this year.

The Semiconductor Industry Association's influential annual forecast sees

global chip sales plunging 31 per cent this year from some $200 billion in 2000.

That would be the worst-ever decline, easily eclipsing the 17 per cent tumble in

1985.

Worst is behind the industry

Now, following thousands upon thousands of job cuts at chip companies around

the globe, the worst seems to be behind the industry, with some faint signs of

seasonal strength in the fourth quarter, the industry's strongest due to holiday

sales.

Both Intel Corp., the world's largest chipmaker, and its rival Advanced Micro

Devices Inc. have boosted their sales forecasts, suggesting that holiday sales

of PCs may not be quite as grim as many had feared.

Taiwan Semiconductor Manufacturing Co. (TSMC), the No. 1 contract microchip

maker, said Dec. 3 it expected fourth-quarter net profits to jump more than 150

per cent from the third quarter.

Typically, sales in the first quarter fall off after the holiday-fattened

fourth quarter, and this time should be no exception, analysts said. The

question is how much of that strength, if any, will persist, even after

accounting for a drop-off in sales following the New Year.

"The question is will the strength or stability we see now remain as we

exit the year," Scovel said. "The first half of the year doesn't have

much seasonal support, so I think we're going to rumble along the bottom

here."

Global chip sales are forecast to rise a modest 6 per cent in 2002, according

to the SIA, an estimate some analysts consider overly optimistic, and then

increase by 21 per cent in each year through 2004. Chip sales actually ticked up

by 2.5 per cent to $10.4 billion in October from September.

PCs and computers account for about 45 per cent of total semiconductor

revenues, and more than 100 million PCs are shipped each year. If that industry

is hurting, it damages the overall sector.

Other signs of stabilization

In addition to Intel and AMD, there are other signs of improvement, or, at

least, stabilization.

TSMC Chairman Morris Chang said fourth quarter capacity utilization -- the

percentage of a chip plant being used -- is likely to rise by several percentage

points in the fourth quarter after falling throughout the first nine months of

2001 to 41 per cent by the third quarter.

It was signs like these indicating that TSMC may be at the forefront of a

global tech recovery that made it attractive to JPMorgan Fleming's David

Atkinson, who manages the $93 million JF global equity fund.

"That's why we own TSMC, because we believe that earnings hopefully will

catch up with that company," he said.

As semiconductor companies reported third-quarter earnings, their sales

forecasts have become less ominous, although still far from the heady days of

1999 and 2000 when revenues surged 30 per cent or more quarter after quarter.

Texas Instruments, Inc., the biggest maker of chips found in cellular phones,

late last month reconfirmed its guidance that sales in the fourth quarter will

fall about 10 per cent from the third quarter, noting that it had begun to see

signs of stabilization.

German chipmaker Infineon Technologies AG has given the faintest hint that

memory prices, which have fallen 60 per cent this year, may be stabilizing.

STMicroelectronics, Europe's biggest semiconductor maker, reaffirmed its

sales and gross margin forecasts for the fourth quarter, lending further

credence to the theory that the bottom of the global downturn in chip sales is

at hand.

Niche markets doing well

Foundries, or contract chip makers, may help lead the industry out of the

slump, beginning in the middle of next year, analysts said.

But the days of rapid 20 per cent growth in the PC industry year-on-year

aren't likely to return. The industry is maturing, and Microsoft Corp.'s new

operating system, Windows XP, hasn't been as big a demand driver as many had

initially thought.

Still, the PC industry will grow at a respectable 10 per cent, maybe as much

as 15 per cent, and other areas are likely be stronger within the semiconductor

industry, analysts said.

Indeed, niche markets within the sector are doing reasonably well this year,

despite the downturn, and will likely post respectable gains next year as well.

These include the market for flat panel displays, a small but quickly growing

market. and DVD players which are enjoying strong sales this holiday season.

"DVD is doing well, digital cameras are doing well and video games are

positioned to do well for the next several months," Scovel said, pointing

to the recent launch of new video gaming systems from Nintendo, Sony and

Microsoft.

Others point to gains next year in the beleaguered memory-chip segment, which

includes dynamic random-access memory, or DRAM chips, and flash chips, which

retain data when power to them is switched off.

Devan Kaloo, a fund manager with Aberdeen Asset Management Asia in Singapore,

said he was betting more on the upside potential of DRAM stocks due to the

alliance and possible merger between South Korea's Hynix and US-based Micron

Technology Inc., even as Aberdeen remains underweighted in technology stocks in

general.

"Both TSMC and UMC are leaders in the foundry space and that has already

been priced into their stocks, which have risen significantly year-to-date, but

DRAM stocks are trading at much lower multiples due to the commoditization of

the segment," he noted.

Bouncing around the bottom

The telecommunications and networking sectors of the chip market are still

suffering from a build-up in inventory among their customers. Telecommunications

companies have slashed capital expenditures to cope with expected demand that

never materialized, said Hong Kong-based Merrill Lynch analyst Daniel Heyler,

adding that excess inventories will remain an issue through the first half of

next year.

But once that inventory is burned off in the entire industry, global

economies start to expand again, sales growth and increasing profits at

semiconductor companies around the world will follow. It just won't happen in

2002.

"The good news is we've hit bottom and the bad news is we're going to

bounce around here for a while," Scovel said.

(with Michael Kramer in Taipei, Kim Miyoung in Seoul, and Jennifer Tan in

Singapore)

© Reuters Limited.