The Chip Sector Is No Longer A Tech-Industry Bellwether
by KEVIN J. DELANEY
Staff Reporter of THE WALL STREET JOURNAL
HANNOVER, Germany -- In olden days, traders surveyed ships coming in and out of port to assess trade in commodities like coffee and sugar. In the boom years of the technology economy, analysts tracked orders and shipments of semiconductors for an idea of where the rest of the technology sector was headed.
The theory remains the same -- computer chips are more than ever a basic ingredient for virtually every technology product. But analysts say changes in how the industry is structured means their sales are no longer as reliable a predictor of the broader ups and downs of the technology sector. "Unfortunately it is not always a given that the semiconductor industry is an indicator of a recovery," says Peter Sondergaard, head of research at Gartner. "In some instances these semiconductor industries are actually a lagging indicator."
In certain cases, that's because the chips they sell are made into goods that aren't immediately sold. They sit in products where there can be a backup in inventory. That's something that occurred in 2001, where telecommunication-equipment sales lagged behind expectations.
Looking at what the chip makers were shipping left the impression that things were humming along, but many of the semiconductors ultimately just wound up piling up at the buyers' warehouses when customer demand fizzled. "They are an indicator that people are buying things," says Andrew Norwood, senior analyst with the semiconductor group at Gartner's Dataquest unit in London. "But they are not necessarily an indicator that people are selling those things."
In other cases, semiconductors are less useful as a leading indicator because the chips are ordered as manufacturers are practically moving the final products out the door to the customers. Such so-called manufacturing-on-demand, pioneered by companies like Dell Computer, has been widely adopted in the personal-computer industry. What that means, though, is that the final makers of the products may offer better indications of a change in industry sentiment than the chip companies.
Analysts say the chip sector does sometimes offer hints at where the rest of the industry is headed. In September 2000, analysts expected prices for the DRAM memory chips used in computers to rise. Instead prices headed sharply lower in the subsequent weeks in what turned out to be a precursor of the broader technology downturn.
"For some reason semiconductor inventory piling up has been the start of a down cycle and shortages have been the start of an up cycle," says Charles Elliott, technology strategist at Goldman Sachs in London.
On that front, the signs are slightly encouraging. A three-month moving average of semiconductor inventories compiled by the U.S. Commerce Department for January showed that inventories were shrinking compared both with the three-month averages for December 2001 and January 2001.
But Mr. Elliott predicts it could well be a false signal. "My own guess is that we're not seeing end markets getting better at all and we won't see them for some time," he says.
Gartner Dataquest forecasts the global semiconductor industry will grow around 3% to 5% this year, after shrinking more than 30% in 2001.
Mr. Sondergaard says inventory levels at the stores and companies that re-sell mobile phones and PCs often offer a better early indication of where the broader sector is headed. "That then spills over into the semiconductor industry," he says. |
