Chip Suppliers Undergo Revival
Industry Update
June 22, 1999
by Paul Franson
While the semiconductor industry as a whole staggered the last few years, suppliers of networking chips strutted. In 1998, worldwide semiconductor revenue was down 8.4 percent, according to Dataquest Inc. of San Jose, a unit of market research firm Gartner Group Inc. Nevertheless, Lucent Technologies' Microelectronics Group of Allentown, Pa., the largest supplier of integrated circuits used in wired communications, grew 16 percent to just over $3 billion in revenue. Siemens Semiconductors, another big maker of communications ICs, was the second fastest-growing chip supplier, with 13.6 percent growth. (This unit of Siemens AG of Munich, Germany, was spun off as Infineon Technologies AG on April 1, 1999.) In contrast, the business of many other semiconductor suppliers contracted. Chip giant Intel Corp., one of the fortunate, grew 4.8 percent.
What's producing the boom in communications chips (also known as networking chips) is clear: unlimited end-user demand, the same reason for the explosion in area codes. More people and equipment are connecting to an ever-expanding integrated network of voice, data and video links. All that demand means communications equipment manufacturers, data networking equipment companies and consumer electronics firms require faster, more powerful integrated circuits to build their products around.
The highly fragmented market for wired communications chips reached $20 billion in 1998 and should hit $26 billion in 2002, Dataquest says. The wired market includes conventional and high-speed circuits that connect computers to Ethernet networks, modem chips that connect computers to telephone lines, and LAN hub and switch chips and concentrators. According to Dataquest, the hottest growth areas for communications silicon include xDSL and cable modems, LAN switches and corporate phone system applications like interactive voice response and automatic call distribution. But the largest markets will be in digital cordless telephones and carrier transmission equipment.
The force driving the semiconductor business has unquestionably shifted from PCs to communications, notes Greg Waters, vice president of networks and communications for Lucent Microelectronics. The reverse is also true. "Semiconductors drive new communications technology," says Jeremey Donovan, senior industry analyst at Dataquest. For example, so-called systems on a chip (SOC) integrate the circuitry for entire products onto a single slab of silicon, enabling device makers and service providers to offer consumers and businesses more sophisticated products.
The newest networking chips are patterned after microprocessors, with general-purpose parts that can be used for many different applications simply by writing new software, rather than redesigning the chips. Most of the products that would use such chips exist only on the drawing board, but their imminent development begs a question: Will one company dominate communications chips like Intel dominates the brains of PCs?
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