Nice semi article. "Worst downturn since 1985". Hmmm... wonder what that will mean for the stock prices?
BC
redherring.com
Chip forecasts getting murkier
By Dean Takahashi
Red Herring
April 6
Everybody at the forecasting luncheon for the Fabless Semiconductor Association seemed to agree that the chip industry has hit its worst downturn since 1985. The debate at the moment is about how far the industry will fall and when it will begin to recover.
The outlook deteriorated so quickly that Jodi Shelton, president of the FSA -- whose "fabless" membership comprises companies that design chips which are fabricated by other companies -- said with some embarrassment that a market survey conducted in December and January was already outdated, as it gave an unrealistic, upbeat view for the second half of the year.
Even then, the group of fabless companies polled forecast that first-quarter revenues would fall 26 percent from the fourth quarter of 2000, while demand for chip wafers -- which are processed and diced into chips -- would fall 13 percent, the first time the group has reported a slip in wafer demand since record-keeping began in 1994. Now many analysts are saying that a recovery in the third or fourth quarter is a pipe dream, or at least that it won't be big enough to warrant overall revenue growth for 2001.
Foundries, the contract chip manufacturers like Taiwan Semiconductor (NYSE: TSM), United Microelectronics (NYSE: UMC), and Chartered Semiconductor (Nasdaq: CHRT), saw their factory utilization plummet from nearly 100 percent in the fourth quarter to 70 percent or less in the first quarter -- a remarkable plunge in just three months. Accordingly, the foundries have slashed their capital spending, with most other chip makers doing the same, with the exception of Intel (Nasdaq: INTC), which (boldly or brashly) plans to adopt new technologies more rapidly in the downturn.
"It's like going from 100 miles per hour to 10 miles per hour in the space of ten feet," says Jim Kupec, president of Taiwan-based United Microelectronics's U.S. unit.
DOOMSDAY SCENARIO
Dan Niles, an analyst at Lehman Brothers, was the most bearish on the chip industry at the FSA event, saying that the chip market may be weak for a couple of years. He says chip makers shouldn't have been so surprised by the rapid deterioration of the market.
"The signs were there -- with the dot-bombs, the weakness in the PC market in October -- but a lot of the communications chip makers ignored it," Mr. Niles said. "Now the PC industry has worked off a lot of its inventory, but the communications companies still have a lot. This is going to be painful and last a while."
Mr. Niles said the market is suffering from multiple blows, with rolling recessions possible as weakness in the U.S. and Japan spreads to Europe and Asia. All told, he estimates the market crashes to have wiped out $10 trillion in paper wealth worldwide, about 30 percent of worldwide gross domestic product, making consumers everywhere feel as if they don't have any money to spend. In the 1996 chip downturn, the PC market was weak but communications was strong. By contrast, the PC market is now weak, wireless communications is weaker, and wired communications is worst of all, he says. In the second half, Mr. Niles expects much weaker pricing across the board as chip makers try to stimulate demand to fill excess capacity in their factories.
Chip makers were reluctant to accept the slowdown in part because of the fallacious belief that the chip industry moves in five-year cycles. That held true up until the mid-1990s, but now chip makers are bracing for their third downturn in six years. Since 1995, the chip cycle has been out of sync with macro events, but the macro events always manage to drag down growth, as with the PC market slowdown of 1995, the Asian financial crisis of 1998, and now the collapse of the U.S. market. Using history as a guide, the downturn in chips shouldn't have happened until 2003.
ON THE OTHER HAND
Analysts Jim Feldhan of Semico Research, a market researcher in Phoenix, and Mark Edelstone of Morgan Stanley weren't as pessimistic. Mr. Edelstone still believes communications expansion will continue to drive the economy forward, albeit at a slower pace, and that Federal Reserve rate cuts will stimulate the economy by the fourth quarter. Mr. Feldhan is looking for recovery starting in the third quarter. Gartner's Dataquest unit, meanwhile, expects a recovery in chips by the second half, but another downturn in 2002, says analyst James Hines.
"There is nothing like this drop since 1985," Mr. Edelstone said. "But the market should turn up by the first quarter of 2002, when the year-over-year comparisons should be easier for companies to beat."
While IPOs have slowed in 2001, acquisitions continue. Maxim Integrated Products (Nasdaq: MXIM) agreed to buy Dallas Semiconductor (NYSE: DS) for $2.5 billion, and LSI Logic (NYSE: LSI) agreed to buy C-Cube Microsystems (Nasdaq: CUBE) for $878 million. Mr. Edelstone expects more consolidation as smaller companies try to find a corporate savior during the tough times.
When will demand get better? The FSA forecasts a shortage of chip wafers once again by 2003, driven largely by the cutbacks in capital spending occurring now. Indeed, the foundries say they can still make money even if factory utilization falls near 50 percent, but at that level they won't be able to generate money to reinvest in the business. |
