A Double-Dip In Chips?
Arik Hesseldahl, 08.20.02, 5:13 PM ET
NEW YORK - It was supposed to be in full recovery mode by now, but the bounce-back of the global semiconductor industry seems to be stalled for the foreseeable future.
In fact, industry insiders are now expressing fears that a double-dip scenario may be in the works. Following last year's 33% drop in chip sales, this year is on course to show modest growth. But, as with the wider economy, some analysts are starting to talk about the possibility of a weaker 2003.
It's happened before. After chip sales dropped 9% in 1996, they recovered slightly by 4% in 1997. That's when the Asian financial crisis teamed up with an oversupply of memory chips to deliver a 9% drop in 1998.
It could happen again. The U.S. economy is growing only sluggishly, and that could combine with the ongoing oversupply in memory chips to push the wider chip market into the sink again and into double-dip territory. Memory-chip makers like Micron (nyse: MU - news - people ) and Infineon (nyse: IFX - news - people ) are still having a tough time making any money in the anemic memory-chip market. And aside from Dell (nasdaq: DELL - news - people ), PC makers and their component suppliers, among them Intel (nasdaq: INTC - news - people ) and Advanced Micro Devices (nyse: AMD - news - people ), certainly aren't seeing healthy sales materialize.
The news is bad on other fronts, too. VLSI Research, a San Jose, Calif.-based research firm, reported that activity at chip factories, or "fabs," around the world is slowing. It says that fab utilization rates will drop in August, to 81.9% from 86.5% in June. That doesn't bode well for an industry that should be gearing up for a fourth-quarter bump in sales.
But Brian Matas, an analyst with Arizona-based market research firm IC Insights, isn't convinced, even though he's forecasting the industry to finish the year 2002 with only 3% to 4% growth in chip sales, much as it did in 1997.
"I'm not ready to declare a double-dip just yet," Matas says. "I still haven't given up on the Christmas season. I have a feeling consumer goods like DVD players and digital cameras might just trigger a buying spree."
Consumer electronics, especially DVD players, were one of the few bright spots of last year's holiday season. The Consumer Electronics Association estimated last year's sales at $93.2 billion and forecasts an improvement on that for 2002.
But add computers and other electronic goods into the mix, and the picture still doesn't look good. Matas says U.S. Department of Commerce figures for sales of electronic systems, a wider category that includes consumer electronics, computers and other electronic products, is slumping by about 4% for 2002. "Even during a downturn, there's usually revenue growth there," he says.
What remains to be seen, however, is whether the revenue drop also indicates a drop in unit shipments. "It could be that prices are simply down and that unit shipments are holding steady," Matas says. "If they're holding steady, that would mean the same number of chips being shipped. It's not clear yet."
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