It's not 1984-85--it's deja vu
This semiconductor slump resembles the mid-80s
recession, and it could be over quick
By J. Robert Lineback
Semiconductor Business News
(02/27/01 10:47 a.m. PST)
DALLAS -- For a growing number of
semiconductor industry veterans,
2001 has a familiar and eerie ring.
"I have to say it
feels a lot more
like an '84-85
timeframe, where
the initial
enthusiasm of the
PC was limited by its
supply/availability," said Richard K.
(Rich) Templeton, chief operating
officer of Texas Instruments Inc. The
1984 buildup "led to a pretty tough
correction [in 1985] but just like with
many of our applications--wireless or
broadband [today]--the PC went on
to have a really speculator [growth throughout the] balance
of the 1980s," he said, during Monday's conference call with
analysts after TI cut its revenue estimate for first quarter.
Dallas-based TI and other major semiconductor houses
worldwide are struggling to get a handle on how bad and
how long the 2001 downturn will be before market conditions
rebound. In late 2000, most chip executives were
characterizing the shift from booming sales in the second
quarter last year to slowing orders in the second half as an
"inventory correction." But now more and more managers are
giving in and starting to use the "r" word--recession.
On Monday, TI cut its estimates for first-quarter revenues
to a 20% drop from $3.03 billion in Q4 of 2000. It also
trimmed back its capital spending plans for 2001 from a
previous estimate of $2.3 billion to about $2 billion after
investing $2.8 billion in 2000. The world's fifth largest chip
supplier also announced it was freezing hiring and offering
early retirement to veteran workers (see Feb. 26 story).
TI and other chip veterans might be feeling a sense of déjà
vu, since the 2001 downturn has a number of characteristics
similar to the 1984-85 slump. As far as recessions go, the
mid-80s slump was one of the worst in terms of intensity,
but it was over relatively quickly--certainly when compared
to the last semiconductor downturn, which took three years
to end (1996-1998).
"In 1984, we had huge unit volumes and lot of inventory.
And in 1985, we burned it all off," recalled veteran analyst
Bill McClean, president of IC Insights Inc. "That [1985] was a
down year, but for the semiconductor industry, the market
was back up in 1986 and growing 20% again."
"In 1986, when the semiconductor sales were up 20%,
capital spending was down 20%. I think we might see the
same thing in 2002, even with decent recovery in the
semiconductor market of 15% or better," McClean said. IC
Insights is currently forecasting a 4% decline in total
semiconductor capital spending to $56.7 billion in 2001 (for
equipment and buildings) from a record-high $59.2 billion in
2000. The Scottsdale, Ariz.-based research firm estimates
that capital spending will drop 12% in 2002 to about $50
billion.
McClean sees strong evidence for a repeat of the 1984-85
cycle in the 2000-2001 timeframe.
For example, semiconductor capital spending increased 82%
in 2000, the second highest percentage increase next to
88% in 1984, McClean said. In 2000, computer production
jumped 22%, "again the second highest increase next to
1984, which was 26%," he noted. "In 1984, IC unit volumes
increased 50%--the biggest on record--and in 2000 it was
up 26%, which again was the second largest increase next
to 1984." (Historically, the chip industry increases unit
volume by 13%, he added.)
Like the mid-80s slump, the current downturn is "inventory
driven--unit volumes vs. a decline in overall average selling
prices," McClean said. "This makes the current downturn
different from the last one [1996-98] and the one in
1988-89." Consequently, McClean believes there is a good
chance this will end up being one-year correction--"painful
but probably over quickly."
Painful indeed. Gearing up for a major buildup in broadband
communications and wireless networks, IC manufacturers are
now having to figure out how to keep new capacity ready
for the market recovery--whenever it occurs. It's now easy,
especially when new wafer fabs are costing multiple billions
of dollars.
While TI is cutting back its capital spending plans, it isn't
backing off the startup of 300-mm wafer processing in
Dallas, said Templeton during the company's conference call
on Monday.
"The winners [in the chip business] will have the headroom in
capacity for 0.13-micron and copper [interconnect
processing], and we believe 300-mm will be vital," said TI's
chief operating officer. "We continue on track to bring that
[300-mm] facility online this year." Without giving specific
number, Templeton said TI has lowered its target for wafer
starts in the 300-mm fab by the end of 2001 but the
company is still planning to qualify the plant for early
production later this year.
TI isn't alone in trying to keep up the pace in 300-mm fabs.
Intel Corp. say it continues to plan a record $7.5 billion in
capital spending in 2001, and it will push harder to bring up
new 300-mm fabs, while cutting costs elsewhere with hiring
freezes, travel cuts, deferred pay raises and other moves
(see Feb. 20 story).
Top pure-play chip foundries--such as Taiwan
Semiconductor Manufacturing, United Microelectronics, and
Chartered--are also attempting to maintain their 300-mm fab
plans in the down cycle. Other chip houses--such as
Motorola and Philips--are looking for ways to increase their
use of outside foundries this slump while trimming back
capital spending plans. The problem for most chip suppliers is
the lack of visibility and uncertainty about the second half of
2001.
Motorola president Robert L. Growney on Friday said the
semiconductor business was in a "free fall" and in "recession"
in terms of confidence. Trouble in chip markets and other
systems businesses--such as wireless cell phones--is
causing Motorola to brace for a potential operating loss in
the first quarter on lower-than-expected revenues (see Feb.
23 story). Growney, who is also Motorola's chief operating
officer, cited several problems in this down cycle, including
sudden changes in ordering patterns and the increased
speed at which manufacturers are making decisions about
their own capacity requirements.
Ironically, the Internet--a potential driver of computer and
networking system sales--bears some of the blame for the
chaos and uncertain outlook, Growney told analysts in a
conference call on Friday. "The e-business world has
dramatically changed both the upside and downside
response to changes in market conditions," he noted.
On Monday, TI's Templeton agreed. "We do have a very
fast-correcting systems these days," he said, responding to
an analyst's question about the duration of this cycle.
Another factor in the degree of uncertainty facing chip
makers is the large presence of contract manufacturers in
cellular-phone and communications-systems production. "It
is certainly adding an amplifying signal to this thing," said
Templeton, referring to the uncertain outlook. "The strength
of the upturn we saw in the past year is now being met with
a sharp decline as they [contract manufacturers in Asia] try
to adjust their inventories."
And unlike previous inventory adjustments, this one is not
impacting average selling prices (ASPs) of ICs as much as
downturns in the past, partly due to an increase in custom
ICs, system-on-chip designs, and sole-sourced standard
products. TI, for example, won't see its profit margins get
clobbered as much as it has in the past because most of its
products are no longer commodity semiconductors, said
William (Bill) A. Aylesworth, chief financial officer.
"We are seeing stable pricing," Aylesworth said during the
Monday conference call. He said this situation is different
from TI's past problems in DRAMs and other commodity
markets, which in downturns hammered the company's profit
margins with a double whammy--price erosion on top of
revenue shortfalls from lower unit volumes. |
