Continued indication that demand from MTSN's customers will remain strong....
Ian.
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October 14, 1999
As Supply Tightens, Chip Makers
Expect Better Quarterly Earnings
Dow Jones Newswires
PALO ALTO, Calif. -- After three years of oversupply and sharply falling prices, the semiconductor industry is rushing toward better times.
Once-abundant foundry space is tight, and supplies of products are running low. Companies that had endured mounting losses are preparing for profits as pricing becomes firm.
Nowhere is this more evident than in the production of dynamic random-access memory, or DRAM, chips, which are most commonly used in personal computers.
During the steep, prolonged downturn of the past three years, the industry bled money. For instance, Micron Technology Inc., of Boise, Idaho, lost more than $300 million in fiscal 1998 and 1999, a figure that includes items it claimed in both September-ending fiscal years.
Now, analysts are expecting $3.26 a share in earnings for fiscal 2000 and $6.66 for fiscal 2001, according to a consensus compiled by First Call/Thomson Financial.
Along with the losses, industry leaders such as Micron, Samsung Electronics Co. and Hyundai Electronics Industries Co. -- which completed its merger Thursday with LG Semicon -- reined back on investments in new plants and equipment.
That underinvestment is leading to undercapacity, perhaps by late 2000, perhaps before.
Already, "it's clear things tightened up," said Will Mulhern, senior marketing manager at NEC Corp., the large Japanese DRAM maker. In 2000, "we will transition to a true undersupply situation," he said.
Companies will find there is "still some capacity to be wrung out," observed Steve Cullen, an analyst at Cahners In-stat Group in Newton, Mass. That will appear as plants switch to equipment able to etch smaller circuits onto semiconductors and squeeze more chips onto an eight-inch silicon wafer. But even now, the industry is getting close to a balance between supply and demand, Mr. Cullen said.
The balance between supply and demand will certainly be in place by the second half of 2000, and in following two years, the industry will have less capacity than needed, said Jim Handy, an analyst at Dataquest, a San Jose, Calif., market research firm. These will be the profitable years, he said.
They also will be the years this cyclical industry steps up investments in new facilities -- a move that will head it back to oversupply. Starting in late 2000, Mr. Handy predicts, companies will begin spending on new facilities; when completed 18 months later, they will put an end to the undersupply. By 2003, oversupply should be back in place, he said.
Cycles of boom and bust aren't new to the industry. In 1984 and 1985, for instance, semiconductor makers had the capacity to produce more chips than were needed, just as they did from 1996 through 1999. From 1993 through 1995, though, just the opposite was true: Companies couldn't produce enough.
During the recent downturn, however, the "oversupply has lasted longer than anyone expected," said NEC's Mr. Mulhern. It also was more severe than expected, with losses running deep and some producers, such as Texas Instruments Inc., exiting the market altogether.
The severity of the downturn has some observers believing the upturn will be just as strong.
"Yes, we have an upturn coming, and it should be somewhat related to the severity of the downturn," said Julie Nash, a Micron spokeswoman. "The question is when."
The industry's returning health is reflected in already-climbing chip prices. Since July, contract prices for a 64-megabit chip have risen 38% to $9 from $6.50. Spot market prices, where unsold chips are marketed, soared to $20 from $4.
Some of the increase has come on the heels of the September earthquake in Taiwan and fears of manufacturing disruptions. Taiwan is responsible for as much as 15% of the world's supply of DRAMs, and some experts say DRAM prices could decline temporarily later this month as some of the post-earthquake panic buying ends.
However, prices in the long term should continue to work in the industry's favor. In 1996, DRAM prices tumbled 75%, followed by a 40% fall in 1997 and a 60% fall in 1998. Prices should fall a less dramatic 25% in 1999 and could sink 10% each year from 2000 to 2003, Mr. Cullen said.
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