Chip revenues grow in 1999................................
techweb.com
July 05, 1999, Issue: 1167
Section: Business & Finance
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Semis set to resurge in '99 -- Optimism in the sector abounds as capacity-driven price pressure subsides and lead times begin to stretch
Bolaji Ojo
Intrepidity has overcome semiconductor industry pundits in a big way.
With signs of renewed vigor in the last six months, industry executives are growing more and more confident about declaring 1999 the rebound year.
Capacity-driven pricing pressures that had dampened sales growth are becoming less of an issue, analysts say. Why? Several reasons.
Consumer confidence is increasing in a number of the world's leading economies, buoying double-digit growth in communications- and computer-equipment production this year.
In addition, the Asian economic crisis, which cut into semiconductor sales growth over the past two years, is finally receding. However, the oversupplied DRAM market remains a sore spot.
Still, the end result is this: Worldwide semiconductor sales growth should reach double-digit status for the first time since 1995.
According to the SIA's mid-year report, global chip sales are on track to increase 12.1% this year. And some analysts are projecting even higher growth.
"The SIA is being conservative with its growth forecast for the semiconductor industry," said Erika Klauer, an analyst with BT Alex. Brown Inc., New York, whose company is projecting global IC sales growth of nearly 14% for the year. "The industry has great earning potential, particularly in the DSP and analog segments."
Klauer is not alone. "Given recent developments and our own talks with companies in the industry, we have raised our own forecast for 1999 semiconductor revenue growth from 12% to 15.5%," said Mark Lipacis, an analyst at Merrill Lynch & Co. Inc., New York.
In fact, global semiconductor revenue, led by DSP and memory products, should climb 53%, to $215.7 billion, by 2002 from the 1999 estimate of $140.8 billion, according to the SIA.
"Lead times are stretching, some product areas are unable to meet demand, which is positive for capacity utilization and price stability," said Avo Kanadjian, senior vice president for memory marketing at Samsung Electronics Co. Ltd. "I'm very optimistic about demand for electronic hardware. I think the semiconductor industry will enjoy one decade of growth."
The analog segment is expected to lead the market higher, propelled by demand for communications devices. DSPs, too, will stage a dramatic recovery, analysts said.
But memory devices, including DRAMs, SRAMs, EPROMs, and flash will continue to exhibit their historical volatility in the coming years, according to the SIA.
Analysts see the semiconductor industry expanding at a faster clip due to a surge in cellular-telephone usage, driving sales of DSPs and analog chips. Texas Instruments Inc., for example, expects worldwide shipments of digital cellular phones to jump to 245 million handsets this year.
But it isn't just the cellular-phone boom that will lift chip sales this year. Semiconductors are popping up everywhere. "Indeed, semiconductors are usurping value in virtually every type of electronic product," said SG Cowen Securities Corp. analysts in a recent report.
And it isn't just analog and DSP chips that will demonstrate healthy growth. Semiconductor manufacturers have reported growth in nearly every sector of their business.
"Demand for SRAM and flash-memory chips has exceeded everyone's ability," Samsung's Kanadjian said. "There's been an explosion in demand because of the Internet."
Analysts agree that the Internet and communication sectors are driving double-digit chip growth, though few want to predict how the unfolding scenario of voice, data, and video convergence via the Internet and cable will play out, not to mention who the eventual winners will be.
Industry executives, including Derrick Best, vice president of marketing and sales at Silicon Storage Technology Inc. (SST), said applications other than PCs, which have historically fueled semiconductor industry growth, will begin to carry the market. Best said his company is looking to serve other segments of the electronics industry, like computer games and multimedia products such as DVD players and other devices for the communications market. "What we lose in the PC, we'll compensate for elsewhere," he said.
The great paradox of the semiconductor market, though-and one which analysts expect will play a major role in the development of the industry-has been the introduction and success of the low-cost PC. Early in 1998, analysts talked about how the $1,200 PC ravaged manufacturers' margins.
The sub-$1,000 PC quickly followed, and now analysts see low-cost PCs topping out at just under $500. That reality is forcing many PC manufacturers and chip suppliers to change their marketing strategy.
"The PC market in 1999 will be characterized by generous volume growth and weak pricing, especially in the desktop market," Merrill Lynch's Lipacis said. "Over the next few years, we believe telecommunications will be one of the fastest-growing semiconductor markets."
The shift toward the low-cost PC was bad news for the DRAM market. And it remains to be seen if high-volume sales will lessen the devastating effect falling prices have had on DRAM suppliers. So far, low price tags have not prompted PC OEMs to increase PC main-memory consumption.
DRAM prices have been dropping steadily in the last several quarters and could fall even lower in the second half of the year before firming in the first quarter of 2000.
"The gloom and doom that pervaded the industry last year was driven by DRAM," said Chuck Byers, a spokesman for Taiwan Semiconductor Manufacturing Co. Ltd. (TSMC). Since March 8, the average price of a 64-Mbit DRAM has fallen from a little more than $9 to about $5.41, according to Merrill Lynch.
The price decline has resulted in a nasty jostling for supremacy among DRAM makers; those that can slash production costs will likely survive, analysts said. Leading the pack is U.S. manufacturer Micron Technology Inc, which expects the unit production cost of a 64-Mbit PC100 DRAM to fall to about $3.50 by the end of the year, according to Takashi Mimura, an analyst with Societe Generale Securities North Pacific Ltd., New York.
Micron's "basic strategy in the DRAM market is to eliminate rival manufacturers, so it is very likely that the company will continue to compete on price until the weaker competitors have been weeded out," Mimura said.
Samsung's officials admit that the stiff competition and price cutting in the DRAM market is a major concern, but said the company will not engage in a price war. Samsung forecasts that prices will drop 35% in 1999 from the previous year and another 20% in 2000. "We are concerned about [DRAM] prices falling as low as $3.50 because it is not a realistic level, particularly if you want to reinvest for growth," said Samsung's Kanadjian. "Micron may continue the price cutting and sell at a loss, but Samsung will not."
DRAM pricing pressure has also forced several DRAM makers to question their long-term commitment to PC main memory. As a result, many of Japan's DRAM vendors said they were redirecting their efforts toward high-end computing, consumer electronics, and communications applications.
They are not alone. Other semiconductor manufacturers are refocusing their efforts, too. SST for example is looking toward the wireless market. And PMC-Sierra Inc. said it is using a similar strategy to build a niche for itself in the high-speed- networking environment.
PMC-Sierra provides silicon solutions for ATM, T1, and Ethernet switching applications. The company's products, which are used for LAN/WAN switching, mapping, protocol conversion, and transmission, are increasingly important in the current Internet-dominated environment.
"PMC-Sierra wants to provide a forklift upgrade of current legacy products to facilitate multimedia communications over the Internet," said Steve Perna, vice president of marketing at the Burnaby, British Columbia, company. "We're seeing ATM being deployed over WAN in the carrier space. It's a new network architecture, and companies are using PMC-Sierra products to lower their time-to-market. Customers see our R&D as an extension of their own R&D."
Shorter time-to-market has become a significant tactic by which companies can distinguish themselves and win and maintain market share in the semiconductor industry. This has spurred many semiconductor makers to collaborate with outside R&D operations and intellectual-property companies.
"Predesigned intellectual property has become a major tool in the hands of semiconductor makers wishing to differentiate themselves and lower costs," said Mark Templeton, president of Artisan Components Inc., San Jose. "Because chip prices have kept falling, it has become even more important for companies to reduce costs in order to maintain a healthy profit margin."
That's where companies such as Artisan come in, Templeton said. Artisan helps slash time-to-market by licensing its designs to semiconductor manufacturers for the development of systems chips used in complex, high-volume applications such as portable computing devices, cellular telephones, consumer multimedia products, automotive electronics, PCs, and workstations.
"The old business model of overly greedy designers stifling growth because they worry so much about protecting their intellectual property didn't work," Templeton said. "The companies that are going to be successful are the ones that outsource all the way and, like Nike, focus on design, product architecture, and branding."
Analysts said one of the major challenges semiconductor companies will face is how to focus on core competencies and avoid investing in unnecessary-and costly-fabs. How closely capacity-expansion investments track future demand will be a major determinant of how semiconductor companies fare in the immediate future, they said. Foundries, too, are trying to strike a balance between ensuring they meet future needs while avoiding the overcapacity that grounded the industry in the past.
For now, many companies are simply raising their capital expenditures, believing that current capacity will have to almost double in the next decade.
Earlier this month, Intel Corp. reactivated a 300-mm development fab that it had frozen because of concerns over demand. Motorola, Infineon, and STMicroelectronics have likewise resumed capacity-expansion plans.
TSMC, the world's largest foundry, is also increasing capacity and forming alliances with partners to meet OEM demand. TSMC has increased its 1999 projected capital expenditure to about $1.2 billion, more than double the initial estimate of $500 million, according to Byers. Capacity-utilization rates at TSMC's plants are well above 90%, forcing the company to secure additional capacity elsewhere and through joint-venture projects with Acer and Philips. "We have also put in equipment orders to create additional capacity in Taiwan," Byers said.
Copyright (c) 1999 CMP Media Inc.
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