Tech-market reprieve may be on Q3 horizon
By Will Wade
EE Times
(04/19/01 19:43 p.m. EST)
SAN MATEO, Calif. — In the explosive aftermath of this week's nearly apocalyptic earnings reports in semiconductors, the sound of the industry hitting bottom may have been inaudible.
The argument gains some credence with a glance at history and a look between the lines of company reports, which reveal that falling demand in many semiconductor sectors — though not all — seems to be firming.
"We are looking for the semiconductor market to start to pick up in the third quarter," said Bill McClean, president of market research firm IC Insights (Scottsdale, Ariz.).
But signs of a recovery are still faint, making it difficult to predict when it might take place. Indeed, in conjunction with the lousy revenue and earnings reports, Taiwan Semiconductor Manufacturing Co. chief executive Morris Chang confirmed that his company's average utilization rate is turning anemic as the industry downturn settles in. TSMC previously said the semiconductor slump would not significantly alter its technology road map.
The healthiest-looking sector among the anemic is computing, where there are whispers of recovery.
While Paul Otellini, executive vice president and general manager of Intel Corp.'s architecture group, called the first quarter "a tough order," he predicted that the second quarter will bring the bottom of the downturn for microprocessor sales. Intel has started to see improved orders for its flagship processors, while demand remains weak for non-PC products like flash memory, he added.
Jonathan Joseph, managing director for investment banking firm Salomon Smith Barney, said he has observed stronger motherboard shipments coming out of Taiwan for the past three months and increased demand for notebooks and desktops.
Signs of recovery
"We believe there are some early signs of recovery in PCs," Joseph said. He has predicted that the chip market is now very close to the bottom of the current slump, although it could be several more months before it begins to head upward.
But the news from Intel and rival Advanced Micro Devices Inc. — which saw sales rise 1 percent quarter-to-quarter — was offset by news from Hewlett-Packard Co., whose revenue is expected to be off 2 to 4 percent for the quarters, as well as other financial analysts.
The wireless market is also showing very early signs of recovery, although some might argue it's a false spring.
Texas Instruments Inc. (TI), whose earnings were off 17 percent from the first quarter, said its largest customer, Nokia, has burned through its excess inventory and has placed new orders. This, however, is not true of TI's other major customers, and demand for cellular handsets — one of the biggest destinations for TI chips — remains weak, according to Bill Aylesworth, senior vice president and chief financial officer at the company. "We saw no signs of stabilization as we moved through the quarter."
IC Insights' McClean predicts that the bottom for that segment could come in the third quarter, and some resurgence could come in the fourth quarter of this year.
The sector that is expected to slog on for many quarters remains networking silicon, which has been battered by the collapse of the networking-gear business. To compound the sector's woes, a secondary market for used routers and switches is emerging as some e-companies liquidate their assets, further cutting into system sales. Business fell off so suddenly that John Chambers, president and chief executive of Cisco Systems, said, "In fact, this may be the fastest any industry our size has ever decelerated."
Further bad news from Cisco last week, which laid off 8,500 workers and estimated a drop of 30 percent in third-quarter earnings, was followed by grim stories from Vitesse Semiconductor Corp. and Broadcom Corp.
At least one analyst, Dan Niles of Lehman Brothers, has predicted that this downturn could be one of the worst on record, at least as bad as the horrendous decline seen in 1985. Indeed, the parallels are spooky.
Semiconductor unit shipments last year were the second strongest McClean has seen in his years of tracking chip data. The top year? 1984. This year will be only the second time in the past 20 years that unit shipments actually declined from the levels of the prior year; the last year that occurred was 1985. "This downturn is a lot like the mid '80s," he said.
The good news is that 1986 was a banner year, with revenue growth in the chip industry of 23 percent. McClean expects that trend to repeat itself, and he is forecasting overall growth for 2002 of 18 percent.
The big issue in the chip market remains the macroeconomic picture, and this is where the scenario that compares this year's downturn with that of 1985 begins to fall apart.
Total global gross domestic product in 1984 was a very healthy 5 percent, and even though the chip market fell apart the next year, GDP in 1985 only slid to 3.7 percent, according to McClean. Last year's global GDP was 4.9 percent, much like the 1984 figure, but with overall economic figures slowing, he expects next year's figure to come in at 2.8 percent. That kind of decline is exactly what lowers consumer confidence and purchasing ability, and delays across-the-board economic recovery.
Carl Johnson, president of market research firm Infrastructure (Irving, Texas), said that a third factor must be considered in this downturn: stagnant technology. While most observers are tracking the cyclical nature of the PC market, Johnson points to the maturity of the technology, which has led to pricing levels far below those seen in the past. This in turn means much lower profit margins, and can require a shift in business models.
Additional reporting by Mike Clendenin in Taiwan. |
