"My feeling is that this upcycle will last at least four years." says Bing Yeh!
Is Chip Bubble About To Burst?
MONDAY, JULY 10, 2000 3:27 PM
- TechWeb
Jul 10, 2000 (Tech Web - CMP via COMTEX) -- Is the semiconductor
market's two-year upcycle winding down?
The mere suggestion provoked a furious rebuttal last week frombullish
industry leaders, whose cries of protest sought to drown out the
dissenting opinion of a lone Wall Street analyst.
But despite repeated assurances that the sector's fiscal outlook is still
positive, a number of fundamental questions remain: How reliable are
current component and OEM sales forecasts? Will rising capital
expenditures lead to overcapacity, and if so, when? Are clouds
gathering on the chip horizon or only in the eye of one observer? In
other words, how healthy is the semiconductor industry, really?
Coming so soon into an upturn that many predict will last up to four
years, these were not questions the semiconductor industry was
expecting. But in a report released last week, Jonathan Joseph, an
analyst at Salomon Smith Barney, San Francisco, cast doubt on
assumptions that the current chip upturn will stretch well into 2001
and perhaps beyond.While not forecasting a downturn, Joseph's report
noted that a "slowdown in the [semiconductor] group may take six to
nine months...given what we believe are slowly reversing industry
fundamentals."
Drawing a bead on several leading semiconductor companies,
particularly in the area of flash memory, Joseph lowered his ratings for
Advanced Micro Devices (stock:AMD), National Semiconductor
(stock:NSM), Silicon Storage Technology (stock:SSTI), and Texas
Instruments (stock:TXN).
"For most of this year, we have become increasingly concerned about
the top-down picture, but have been reassured the upcycle was intact
as lead times continued to extend, prices firmed, and inventories
remained low," Joseph said. "The bottom-up picture, however, went
cautionary recently, apparently brought on by a slight slowing in
cellular phone growth expectations and the rapid increase in capacity.
We do not believe summer slowing is the culprit."
Joseph lowered his rating on the semiconductor industry to "neutral"
from "outperform" based on the following observations:
• Capital spending growth should peak this year, and peak
years in capital spending closely correlate with peak years in
semiconductor growth;
• Unit growth reached 34 percent in February, an all-time high,
but has fallen three months in a row, settling at 30 percent in May;
• Lead times for components such as power amplifiers, DSPs,
and tantalum capacitors are contracting;
• Average selling prices of some commodity components have
begun to moderate in the spot market;
• Inventories are rising at semiconductor companies and
contract manufacturers.
Many industry executives dismissed Joseph's report as too general,
while several analysts faulted some of his assumptions, including his
emphasis on capital- expenditure growth. At Texas Instruments, SST,
and National Semiconductor, miffed executives disagreed that the
semiconductor industry -- and their segments of the business in
particular -- may be headed for slower revenue growth.
"Nobody has a perfect crystal ball, but the signs we're seeing are
pointing to a lot of strength, not only this year but for 2001," said Ron
Slaymaker, vice president of investor relations at TI, Dallas.
"I don't believe we have reached a peak," said Bing Yeh, president and
CEO of SST, Sunnyvale, Calif. "My feeling is that this upcycle will last
at least four years."
Based solely on such industry anecdotes, Joseph's expectations of a
potential reversal in the chip market and especially flash memory may
seem inaccurate. Industry executives at SST and Samsung
Semiconductors, San Jose, Calif., said their flash memory production
for 2000 and the first quarter of 2001 are already sold out.
"We don't see a slowdown three or four quarters from now," Yeh said.
"We're taking orders now for the second and third quarters of 2001."
Similarly, at Samsung all memory chips are in short supply, and the
situation is getting worse, according to Bob Eminian, vice president of
marketing.
"We only see a very tight market for some time to come," Eminian
said.
Samsung is also sold out of SRAMs for nine months, and DRAMs are
sold out well into the fourth quarter of this year, he added.
In the DRAM market, Hitachi Semiconductor (America) (stock:HIT)
said demand continues to exceed available industry supply. Ron
Bechtold, vice president of the San Jose company's DRAM division,
sees no change in sight.
"The proof is that DRAM prices continue to rise on both the spot
market and on OEM contracts," Bechtold said.
National Semiconductor executives said they are "quite bemused" by
assertions that the company's position may be weakened by
exposure to the cellular handset and commodity-analog markets, as
noted by Joseph in his report.
"Our business looks solid," said Pat Brockett, executive vice
president of analog products at National Semiconductor, Santa Clara,
Calif. "We aren't seeing anything that would change our guidance to
the Street. We're not seeing lead times coming in. For that matter,
they've never gone out. We've been judiciously expanding our capacity
for the last five quarters, and we've held lead times in the six- to
eight-week range. We haven't put anything we sell on allocation."
National draws about a quarter of its revenue from wireless; however,
Brockett emphasized that a significant portion of that amount is sold
into infrastructure equipment, which is growing by leaps and bounds
and is far less subject to market fluctuations than handsets.
"To draw a conclusion that we've got a weakness in 25 percent of our
business -- which, by the way, we're not seeing -- while holding our
earnings per share forecast is very strange," Brockett said.
Neither is National's commodity-analog business -- roughly 15 percent
of revenue -- under price pressure, the company said. Rather, the
products are experiencing robust sales in the distribution channel.
National gauges the market by looking at long-term trends in demand
for certain circuits. Some 85 percent of its products are proprietary,
requiring close design-in relationships with customers. In this way,
National can get good forecast data from customers, Brockett said.
The company also looks at industry projections for PCs, peripherals,
handsets, and the general economy.
"There's nothing we're seeing that would say the market isn't going to
grow somewhere around 40 percent this year and have another
healthy year next year," Brockett said. "Even if industry growth next
year cooled off to 25 percent, I wouldn't call that a slowdown."
A spokeswoman for Infineon Technologies (stock:IFX), Munich,
Germany, said the company sees no signs of a slowdown in the
immediate future and that orders for Infineon's products continue to
exceed manufacturing capacity.
"Our backlog is very good, between six and 12 months out," she said.
"There are no worries here at all. Business is still very positive."
In fact, the future appears so rosy at Infineon and several other chip
makers that many companies have taken to pre-announcing positive
second and third quarter results. In June, Infineon raised its fiscal
2000 third quarter income estimate and advised investors that "higher
memory prices, which have been rising sharply since June, as well as
above-average productivity gains, if continued, are likely to lead to
even higher income in the fourth quarter."
Executives at Future Electronics, a top-tier electronic components
distributor, said signals from its chip customers do not indicate a
slowdown in the year ahead.
"At this point in time, demand is excellent and we don't see any signs
of weakness in our semiconductor segment," said Bob Vaupshas,
vice president of marketing at Future, Pointe Claire, Quebec. "Our
backlog is very strong, about six to 12 months out in certain
segments."
Salomon Smith Barney's Joseph does not dispute the likelihood that
several segments of the semiconductor industry will continue to
witness strong growth in the next several quarters.
However, he said next year the industry is unlikely to repeat or exceed
the more than 30 percent revenue growth forecast for 2000. Joseph
said capital expenditures should peak this year, signaling the
beginning of a slowdown in semiconductor revenue growth.
» More from EBN Additional reporting by Jack Robertson, Crista
Souza, and Darrell Dunn
techweb.com
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