7/02/99 - Chip Recovery Seems Solid
Jul. 02, 1999 (Electronic Engineering Times - CMP via COMTEX) -- For North America's semiconductor makers, 1999 is shaping up as a good recovery year. The consensus is that chip consumption will grow near the 17 percent level that semiconductors have recorded historically.
The comeback is being led by the fabless chip companies and the foundries that make their products-and the market that is driving the industry is communications. With the personal-computer business having lost some of its luster, competitors in that arena are looking to a new breed of consumer appliance to take up the slack.
Overall, there's "a belief among many that we're getting to the end of the bad times for the semiconductor industry," said Tim Kellis, a semiconductor stock analyst with Adams Harkness & Hill (Boston).
In fact, after 1998's miseries even a mediocre year would mean strong growth.
The reason lies in the balance of supply and demand. As analyst Joe Moore of Goldman Sachs pointed out, every time they have a strong quarter manufacturers become more willing to overstock on parts or build inventory. But when business levels off, the entire chain, from OEMs to chip equipment makers, stops and waits for inventory to sell off, exacerbating what would have been a natural dip in sales. As a result, Moore noted, the industry hasn't seen three consecutive quarters of strong growth since 1995.
Growth looks to be particularly strong among the fabless chip companies. They expect CMOS wafer demand to rise by 42.6 percent over last year, according to the annual survey by the Fabless Semiconductor Association (Dallas). The survey showed that for the first time, demand will increase steadily throughout the year rather than see the usual slow first half followed by strong late-year production.
Fabless companies also pushed strongly toward more advanced geometries in 1998. "In the past, companies had not moved to the smaller geometries as smoothly as they could," said Jodi Shelton, executive director of the FSA. But in 1999, geometries of 0.35 micron and less will account for more than half of fabless demand. Orders for 0.25-micron wafers will consume a whopping 39 percent of all fabless demand, compared with 2 percent in 1998.
All of that means an increased dependence on foundries, whose business is booming as a result. Such Asian foundries as Chartered Semiconductor and United Microelectronics Corp. are seeing gross margins as high as 50 percent, Moore said, a figure last reached when capacity utilization hit 102 percent.
Adding to the capacity are the DRAM makers and integrated device manufacturers (IDMs) hoping to join the foundry market. "I can't tell you how many Japanese and Taiwanese companies look wistfully at the foundry market and think how nice it would be to do that instead of making DRAMs," said Joseph Osha, semiconductor analyst for Merrill Lynch (New York).
"You're going to see a lot of new companies going into the foundry business. It's not going to be easy. On the other hand, we're talking about companies that were spending $800 million on a DRAM industry that was [falling fast] last year," Moore said.
It certainly won't be easy. Foundries are not a commodity business, said Morris Chang, chairman of Taiwan Semiconductor Manufacturing Corp. (TSMC), at an industry conference in March. "It's not something you should shop around for price-it's a relationship. The tie that a fabless company or an IDM has with its foundry is a relationship."
That is why IDMs haven't risen above being "part-time amateur" foundries, Chang said. "One is completely service-oriented, and the other has other bosses."
For the first part of this year, TSMC has seen a burst of activity to drive utilization above 90 percent, said Roger Fisher, senior director of marketing. As a result, TSMC is accelerating the capital equipment spending that was slated for later this year.
In fact, 1999 could turn out to be good for equipment makers such as Applied Materials Inc. and Novellus Systems Inc., a side effect of last year's Asian economic crisis. "The good thing that came out of the Asian crisis last year was that it forced the hands of companies to cut back on capital spending," said Mark Edelstone, semiconductor analyst for Morgan Stanley Dean Witter (San Francisco).
DRAM makers had continued to pour money into fabs even as prices were plummeting, and the spending spree stopped only because the money ran out. "I would argue that without the financial problems last year, you couldn't have the supply-side-driven recovery," Moore said. "It almost takes an external factor to establish some discipline on capital spending."
Some were saying that the equipment industry was poised to bounce back early in 1998. That didn't happen, Moore said, because it took time to absorb the glut of new fab construction. "You hadn't had enough pain," Moore said. "Now, after three years, I think we've had enough pain."
Because of the lag caused by the Asian crisis, there is now a chance that wafer supply could reach a safe equilibrium with demand-not enough to cause shortages, but also not so plentiful that chip makers happily build up inventories. "The only concern is that companies around the world will step on the gas pedal too fast," Edelstone said.
In specific semiconductor applications, communications continues to be the hot destination, with chip makers diving for slices of the data-infrastructure expansion pie. That could pave the way to more deals like Intel Corp.'s $2.2 billion acquisition of Level One Communications Inc- an agreement that bore fruit with the companies' May announcement of a Level 3 switching chip.
"We look at little datacom companies literally one a week," analysts were told last November by T.J. Rodgers, chief executive of Cypress Semiconductor Corp. "Anything in datacom we'd buy in a minute. However, that's not likely, because the whole world knows that," since the demand for networking technology has driven company valuations up by eight to 10 times, he said.
But, Merrill Lynch's Osha said, U.S. companies might miss the boat on another promising market. "I am less convinced when it comes to information appliances, because the big customers are not here. They're in Japan," he said. "The one thing I see lacking on this side of the Pacific is consumer orientation [in semiconductors]."
North American chip makers have footholds in older information devices such as PDAs and set-top boxes, Osha said, but they're ill-poised to participate in the next wave of electronics, such as HDTV and information appliances. Already their grip is slipping-for example, LSI Logic Corp. lost its Playstation spot to Toshiba for the Playstation 2.
However, technology companies can sense a wave of change coming. In particular, the PC-centered suppliers are strengthening their bets in non-PC futures-an example is Microsoft Corp.'s recent $5 billion investment in AT&T. The deal nets the software giant a Windows CE slot in 10 million set-top boxes and a hedge against a PC-less future.
"My guess is [that] the PC is a blip in the road of computing devices, " said Dean Klein, vice president of Micron Technology Inc.'s integrated products group. Many PC uses today could be replaced by future devices. For example, HDTV might wind up consuming much of the PC games market, he said.
"At that point, I think we'll see the PC industry go through some drastic changes," Klein said, noting that Micron is teaming up with partners to map out some of these future possibilities. "It certainly spells out the need for certain types of alliances."
But Eric Lewis, who follows PCs for International Data Corp., said he doesn't think the PC's days are numbered. More likely, they will coexist with information appliances that take the shape of today's consumer goods: stereos, TVs, cars.
"I don't think the PC makers are that interested in it. They're more interested in being able to expand the power of the PC. I'm not talking about just megahertz, but the ability to do more things with the PC."
In fact, Lewis said, the PC market itself shows little sign of being consumed by information appliances or by the sub-$1,000 models.
Unit sales for the first quarter of 1999 were 20 percent higher than for the same period of last year, according to IDC. Even considering that the first quarter of 1998 saw low sales, the figures are impressive, IDC analyst Eric Lewis said.
Most geographic areas saw PC sales climb in the first quarter of 1999 and those that didn't were suffering from overall economic woes rather than flagging PC demand, Lewis said. "We're in a consumer boom due to low prices and the Internet," Lewis said. "Take low prices, high income and the Internet and you've got a boom."
PC prices do continue to fall, but that's not wiping out revenues, Lewis said. Rather, it's encouraging more rapid replacement of old machines and an increasing number of two- and three-PC households.
IDC was revising its PC revenue figures, but Lewis expected to see "single-digit growth" in the first quarter over same-quarter 1998 numbers |
