PC sales turn up, volumes up, unit pricing down, memory overcapacity issues, bottom seen as wide flat zone, more pain ahead.
A service of Semiconductor Business News, CMP Media Inc.
Story posted at 4:30 p.m. EDT/1:30 p.m., PDT, 8/7/98
Analysts wary of predicting recovery
By Will Wade
SAN MATEO, Calif. -- While there are some signs that the
beleaguered chip industry may see daylight soon, several analysts are
warning against expecting too much good news too soon.
Although PC sales are expected to be strong through the end of the
year and some firming in the DRAM market has already been
observed, overall revenues are still expected to be down this year. In
short, it is possible that the second quarter was the bottom of the
slump, but it's almost difficult to say whether the industry is now
heading up, or if it is still mired at the bottom of the trough.
The good news is that unit sales are continuing to go up, as always.
But pricing has continued to be a critical factor this year and is likely
to remain the main factor. Nevertheless, supporting a mildly
optimistic report that came out earlier this week (see Aug. 6 story),
the industry will drop this year but is likely to recover somewhat next
year according to analysts.
Jim Feldham, president of Semico Research Corp., said that the
overall semiconductor market will fall 4% to 6% in 1998, but will
rebound about 10% in 1999. Unit growth has not changed much this
year, but Feldham said declining ASPs are holding down the overall
revenue figures. And with a variety of issues still up in the air, that
trend will probably dominate the chip industry for at least the next
year.
One of the traditional main drivers of the chip industry is PC sales,
which account for about one-third of all semiconductor sales. Those
are expected to be strong through the end of the year. With a strong
economy in the United States and low-cost PCs widely available,
computers will probably be a hot seller at the holidays.
Notably, a cross-section of PC vendors have cut their inventories
over the past six months, from about three months' supply at the start
of the year, to less than one month's worth of systems now,
according to Nathan Brookwood, microprocessor analyst at market
research firm Dataquest Inc., San Jose.
However, that may not translate into higher revenues for the chip
companies, because the driving factor in the PC market is the
sub-$1,000 system. "Unit demand is up, but we are seeing
tremendous price pressure because of the sub-$1,000 machine," he
said. Competition is also getting more fierce in this market, as
microprocessor titan Intel Corp. is facing a tougher battle for market
share from firms like Advanced Micro Devices, Integrated Device
Technology, and National Semiconductor.
"The key factor we've seen is application stagnation, which means
that users don't have to buy at the top of the product line, or even at
the middle, to get the performance they need," said Brookwood.
"Instead of spending an extra $600 or $1,000 for a faster processor,
people are spending that money on a larger monitor or a more
comfortable chair. That won't change until there is a significant
change in the usage paradigm of computers, and I don't see anything
on the horizon."
One of the biggest drains on overall chip revenues this year has been
the DRAM market. The segment saw overall revenues fall about
19% in the first quarter, and another 21% in the second quarter,
according to Sherry Garber, DRAM analyst for Semico Research, of
Phoenix. Although she is projecting revenues to be bolstered in the
second half of the year by higher sales margins for faster PC100
memory chips and higher-density 64-megabit devices, the gains will
not even come close to offsetting the earlier losses.
"We have seen some firming in prices, but that just means we won't
see prices plummeting 40% per quarter," said Garber. Although she
sees revenue upticks of 20% this quarter in the DRAM market, and
another 19% gain in the fourth quarter, she still expects to see an
overall annual revenue decline of 29%. "I don't think the second half
of the year will be the turnaround."
The big issue in the memory market is capacity, and analysts have
said there is anywhere from 15% to 25% more chip-making
capability in the world than the industry needs. The market has
started to see the first casualties from this fab frenzy, with the recent
announcement from Siemens AG that they will shut down a DRAM
fab in the United Kingdom (see July 31 story). Garber also noted
that Samsung Semiconductor and Hyundai Electronics have both
slowed their memory production, and most of the major DRAM
vendors are eliminating production of 16-Mbit chips in favor of the
newer 64-Mbit devices as soon as they can.
However, Brookwood points out that these may be quick fixes. "We
need more shutdowns. People need to remember that unless
companies pull the plug completely and nail the doors shut, those
fabs just start making something else."
Carl Johnson, president of research firm Infrastructure Inc., has
predicted that this is the bottom of the cycle, mainly because so many
companies have lost so much money, and prices have come down so
much, that the industry can't absorb any more losses. Prices can't go
below zero, he pointed out.
Although calling this the bottom may sound optimistic, Johnson
expects to see a broad, U-shaped recovery curve. That means an
upturn is hardly around the corner, and there will be more bad news
before there is good. Noting Siemens' declining presence in the
memory field, Johnson expects to see some bloodshed as smaller
firms go under, and larger firms absorb losses by spilling red ink and
cutting payrolls.
"We need to see evidence that there is a change in perception in the
industry before we will see a major shift in orders, shipments and
capacity increases," said Johnson. "I think right now it's 'show me the
money' time for the industry."
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