Analysts Expect Excess Capacity To Slow Chip Sector's Rebound
From today's Wall Street Journal:
Economists and securities analysts are beginning to see faint signs that the beleaguered semiconductor sector has finally hit bottom after one of the worst downturns in industry history. Yet many agree that any recovery will proceed in an uncharacteristically plodding fashion as the industry works off mountains of excess capacity in the months ahead.
The Semiconductor Industry Association, or SIA, is forecasting a 4.7% increase in chip sales in the fourth quarter from the third quarter. Sales typically pick up at this time of year, yet it would still be the first quarterly improvement in more than 12 months. Meanwhile, prices for low-end memory chips have risen more than 40% since last month, after collapsing during the past 12 months. And some companies are becoming more upbeat in their comments, contributing to large gains in their stock prices.
Earlier this week, for example, Taiwan Semiconductor Manufacturing Co., the world's largest contract chip maker, raised its pretax profit forecast for 2001 by 55% from its September estimates. The company is seeing a pickup in orders from consumer-electronics and communications-gear makers, said Morris Chang, its chairman.
At Intel Corp., after cutting its forecasts for much of the year, Chief Financial Officer Andy Bryant said he is increasingly comfortable with his fourth-quarter sales forecast, made in October -- though he said it is still unclear when the economic downturn will end. Intel's share price is up 64% from its low in September and is now at its highest level since April.
In the overall industry, "orders have bottomed and are re-accelerating from the deepest drop they've had in probably 30 years," says Jonathan Joseph, a chip analyst with Salomon Smith Barney Inc.
Indeed, the SIA predicts that sales will rise next year by 6% after declining 31% in 2001. The real recovery, though, won't begin until 2003, when sales are expected to increase 21%.
An end to the bleeding in the semiconductor sector could mark an important milestone for the U.S. economy and for certain U.S. trading partners, like Japan, Taiwan and Korea.
Semiconductor chips are the building blocks of the technology sector and go into everything from cars to computers to mobile telephones. What's more, chips are a major export in Asia. In Japan, for example, the sector accounts for about a third of all corporate profits outside of the financial arena, according to Salomon Smith Barney. It is nearly a $30 billion industry in Europe.
"People feel that if the semiconductor business were to turn up in terms of sales or profit margins, that might be interpreted as a leading indicator that the broader technology sector has maybe hit bottom," says Stuart Hoffman, chief economist at PNC Financial Services Group.
Historically, this very volatile sector has bounced back quickly from its downturns. Yet this time around, industry executives and economists are reluctant to project a strong, quick turnaround because many companies are still working off huge amounts of excess capacity and excess inventories, legacies of the 1999-2000 boom years.
According to the U.S. Federal Reserve, U.S. semiconductor makers were using only 59% of their manufacturing capacity during October, the lowest utilization level in the U.S. since 1975.
"You could have a pickup in orders and an improvement in business without putting any constraint on the industry's capacity to meet demand," says Mr. Hoffman. That means that chip prices are likely to be soft for many months to come, and profits will remain under pressure. Underscoring this ongoing pressure, International Business Machines Corp. said Wednesday that it would lay off 1,000 workers in its semiconductor unit (see related article).
The industry's big customers have a similar outlook. Two weeks ago, Dell Computer Corp. said it doesn't expect a rebound in the PC market until late spring 2002 at the earliest.
Nokia Corp., one of the largest cellphone makers, said it expects sales of cellphones to rise about 10% next year after declining this year. Still, Nokia further ratcheted back its forecast for this year.
"Next year will be a transition year. And 2003 will be a boom year," said Pasquale Pistorio, chief executive of STMicroelectronics NV, Europe's largest semiconductor maker, in an interview earlier this week.
Last month, the company backed off a July pledge to resume sales and profit growth in the current quarter, though company executives say they are beginning to see early signs of a turnaround. The company's chief economist, Jean-Philippe Dauvin, said he expected momentum to pick up by the end of next year, with a 20% or 25% increase in sector revenues globally in the fourth quarter of 2002 compared with the current quarter.
Kris Chellam, chief financial officer for Xilinx Inc., likens the current cycle to a bust in the semiconductor business in 1985. Back then, a shakeout in the computer industry dried up demand for semiconductors, and it took chip companies nearly three years to get their factories running close to full capacity again. In 1986, "there were a couple of false starts, and it took a little while before we started to see strong growth," said Mr. Chellam. |
