Springs feels microchip
slump
By Tom McGhee
Denver Post Business Writer
Sunday, April 15, 2001 - As microchip makers face
their worst slump since the 1980s, a once-vibrant
swath of the Colorado economy is suffering with
them.
The $204 billion
semiconductor industry
is expected to see
production decline this
year for the first time
since 1985, perhaps by
as much as 20 percent.
Some analysts say the
sector will rebound by
year's end. Others are
more pessimistic.
"History shows that it
could take two to
three years for this to
work itself out, if it is indeed like the mid-80s," said
Dan Niles, an analyst for Lehman Brothers.
Colorado's semiconductor workforce is the
11th-largest in the nation, according to U.S.
Department of Labor statistics. So a downturn
invariably means job losses.
Last week, Milpitas, Calif.-based LSI Logic said it
would close its Colorado Springs manufacturing plant
in August, cutting 500 jobs. And Fort Collins-based
Advanced Energy Industries, which manufactures
components for semiconductor-making equipment,
announced plans to reduce its workforce by 10
percent, or 75 full-time and 89 temporary positions.
Springs hurting
Nowhere in the state is the pain as acute as it is in
Colorado Springs.
Here both Intel Corp. and Atmel Corp., a pair of chip
giants with worldwide operations, have delayed plans
to expand their local manufacturing capacity and add
jobs. And Springs firms that supply more than a dozen
chip manufacturers and designers report a dramatic
slowdown in their business.
Rocky Scott, president of the Greater Colorado
Springs Economic Development Corp., wonders how
long the slump will last - and how badly it will hurt.
"These companies have to make decisions on a
worldwide basis," said Scott. "We're a small cog in a
big machine."
More layoffs in the global chip industry are almost
certainly on the way, said David Wu, an analyst at
brokerage firm ABN Amro in San Francisco.
Scott agrees, though he has no idea how many jobs
will disappear from his backyard.
More than a dozen firms in the Colorado Springs area
either manufacture or design semiconductors.
In a community where the average worker's salary
and benefits add up to about $30,000, employees of
chip firms make more than $40,000, Scott said.
As of last week, 5,642 people - about 4.6 percent of
the 121,000 employees who work for firms considered
the most valuable to the city's economy - were
employed by chipmakers and designers, according to
the Springs EDC.
Total annual payroll for these employees is more than
$225 million.
"These jobs are among the highest-paying and have
some of the greatest impact on the local economy,"
Scott said.
An additional 2,250 people work for firms that supply
the industry with everything from compressed gas to
equipment used to make semiconductors. Salaries
among those workers are also higher than average,
Scott said.
Total all the jobs together and they account for 6.5
percent of the Springs' primary economic base -
defined as jobs for firms that bring money into the
community from outside rather than recirculate it.
None of the employees work in a vacuum. The money
they spend flows through the cash registers of gas
stations, flower shops, grocery and convenience
stores. The companies that employ them spend
money on parts and supplies in the community.
The U.S. Department of Commerce estimates that
every job in the chip industry leads to more than two
other positions elsewhere in a community.
"They bring wealth into the community," Scott said.
"They're what makes the economy go. It's not the
lawyers and the barbers and the doctors who do that;
they just serve the people who bring it in."
Immediate spillover
A downturn in the semiconductor sector has an
immediate spillover effect to related businesses.
Atmel alone dealt with 550 vendors on Colorado's
Front Range last year, 75 percent of them in El Paso
County, most of the others in Denver.
Some of those small businesses were already feeling
the pinch before LSI announced its closing.
Demand for the chemicals and compressed gas that
Air Products and Chemicals supplies to the industry
has fallen by 30 percent since late January, said
Scott Saulnier, territory manager for the Allentown,
Pa.-based firm, which serves many of the chipmakers
in Colorado Springs.
For Alphatronics Electronics, a Springs firm that makes
test probes used by manufacturers throughout the
industry, the drop in sales over the past six months or
so has been a whopping 40 percent, said John
Sanders, the firm's president.
Gary Derbenwick, chief executive of Celis
Semiconductor, a small shop that designs chips,
thought his business was immune to what was
happening in the industry. Then a local manufacturer
that was planning to use Celis' design services put the
project on hold.
"They just said it was because of the downturn."
So far, none of them have laid off employees. But
Sanders said if conditions don't improve, he might
have to let go of some of the eight people who work
for him.
Both serve an industry that is notoriously volatile, and
coming off a high that saw 35 percent growth in
2000.
"If you are in this industry, you really have to have a
cast-iron metabolism," said Kevin Brett, a spokesman
for LSI Logic. "You shouldn't get overjoyed when
things are going great, and you shouldn't get
depressed when things are not going well because
this is the cycle, and you have to respect it."
Glut of equipment
In an industry known for cyclical slowdowns, this one
is different. It has been compounded by carnage in
the technology sector that shredded dot-coms and
drove other businesses to the edge of collapse. The
result is a glut of high-tech equipment loaded with
chips that will have to be absorbed into the economy
before demand picks up.
Semiconductor firms have raised warning flags about
disappointing revenues.
Camarillo, Calif.-based Vitesse Semiconductor Corp.
said it expects its second-quarter revenues to be
between $120 million and $125 million, down from
analysts' estimates of $165 million. The firm makes
gallium arsenide chips in Colorado Springs, where it
has more than 200 employees.
After warning that first-quarter revenues would fall 25
percent from fourth-quarter levels recently, Intel said
it would slash 5,000 jobs, primarily through attrition.
Those cuts haven't had an effect on employment in
the Springs, where the company employs about 1,150
people, Intel spokeswoman Deana Sauceda said.
Atmel warned last week that it expects growth of
around 5 percent in the second quarter, down from 22
percent in the first quarter of 2000. The company has
two manufacturing plants, called fabs, in the Springs.
Construction workers are preparing the foundation for
a third. Atmel originally planned to have the building
complete by mid-2001.
Work on the $1 billion plant has been slowed and now
won't be completed until next March or later, said
Ralph Bohannon, general manager for Atmel's Springs
operation.
"We will be cautious and not cavalier about moving
forward on the expansion," he said.
Intel is testing equipment in one part of a plant where
flash memory chips will be made, and the company
has said it will begin full production this summer.
But the chip giant indefinitely delayed work on a
second portion of the plant, called a fab.
Building a shell and leaving part, or all of it, vacant, as
Intel and Atmel plan is not unusual in an industry
where firms respond to demand by flooding the
market, said Brian Matas, vice president of market
research for IC Insights in Scottsdale, Ariz.
Fabs can cost $2 billion to $3 billion. The building itself
a small part of a price tag that includes equipment
sophisticated enough to bind microscopic transistors
with a web of wire 100 times thinner than a human
hair.
Atmel's building for example, is expected to cost
$250,000, less than a third of the total price.
It takes between one and two years to build a plant
and begin production, said Doug Andrey, director of
finance for the San Jose, Calif.-based Software
Industry Association. Having the buildings available
speeds up the time necessary to bring chips to market
when sales pick up.
17% annual growth
Though there is some uncertainty about a time frame
for recovery, no one is saying that demand won't
improve. In spite of slowdowns that typically arrive
every few years, the chip business has grown an
average of 17 percent a year for the last 40 years,
said Andrey.
A slowdown in demand coupled with a glut of available
chips generally takes the market down.
Companies pump out as much product as possible to
increase their market share when times are good, said
Trevor Yancey, vice president of technology for IC
Insights.
With demand soaring, they build more fabs. Because
the plants are costly to build and operate they try to
maximize their investment by flooding the market with
chips.
Eventually, prices fall and demand shrinks leaving the
shelves of computermakers and other hardware
manufacturers crowded with finished products. The
chipmakers are also left holding onto unsold chips,
Yancey said.
That inventory has to be sold off before chips bounce
back.
This time, the demise of a multitude of Internet firms
has complicated things. Not only did it cut off demand
from those companies, it dampened their Fortune 500
competitors' desire to buy equipment, Lehman's Niles
wrote.
Those old-economy companies saw the dot-coms as
competition and have trimmed their investments now
that the threat is gone.
Businesses that serve the industry are accustomed to
a revenue-linked roller coaster ride.
"It's always scary in the beginning," said Doug Berwick
of Berwick Electric, which installs equipment in the
plants.
The chipmakers come back stronger after a slide, said
Air Products & Chemicals' Saulnier.
Alphatronics' Sanders also has been through the boom
and bust cycles of the semiconductor industry often
enough to know what to expect. But this downturn
doesn't look like the beast he has confronted before.
"In the past, you could predict when it would end, but
you can't anymore," he said. |
