2001 semi slump may be worst ever
By Will Wade and Brian Fuller, EE Times
May 18, 2001 (10:25 AM)
URL: eetimes.com
SAN MATEO, Calif. — The semiconductor sector headed deeper into uncharted waters this week, as new revenue forecasts suggested that 2001 could end up as the worst year in the industry's history. Unusually broad demand declines, worrisome high energy prices and consumer uncertainty are all contributing to a downturn that could result in a 20 percent negative annual growth rate.
Cahners In-Stat Group this week revised its outlook on the market and called for a 15.8 percent decline in revenue for the year, following rival Gartner Dataquest's revision downward to negative 17 percent. But those figures could fall another 5 percentage points unless business picks up in the second half. A sector recession of 20 to 21 percent would be the industry's worst ever, outstripping a 16 percent decline in 1985, prompted in part by worldwide DRAM realignment.
"The reality is the industry is down 20 percent in the first quarter, and Japan and Europe have basically not been affected as yet," said Wilf Corrigan, chairman of LSI Logic Corp. (Milpitas, Calif.). "Take [grim] projections for the second quarter, and the question is, how on earth could you get to even as positive a scenario as down 16 percent for the year?"
T.J. Rodgers, chief executive officer of Cypress Semiconductor Corp. (San Jose, Calif.), who has suffered through five downturns at the company since 1983, sees parallels in another period. From 1996-98 the industry went down 9 percent, up 4 percent and down 8 percent. "There is a possibility that this could be a double-dipper as well," Rodgers said.
"The tech industry is getting the crap beaten out of it, and there's downstream impact of that. When we are a significant part of the economy and we start slowing down — laying people off, and then those people are having to worry about mortgage payments — that can feed back on us," he said.
For the most recent projections to hold, the market will need to be up 5 to 10 percent in both the third and fourth quarters, said Bill McClean, president of IC Insights (Scottsdale, Ariz.). And that kind of recovery is dependent upon some factors that lie outside the high-tech market. Specifically, McClean pointed to the cost of oil and electricity. Both are up sharply, which puts an immediate hit on the wallets of the average consumer. Oil prices have soared in recent years from $9 a barrel to $30, and California just pushed up its electricity rates an average of 50 percent.
All of this is driving down the overall economy, and Steve Cullen, director of semiconductor research at Cahners In-Stat (Scottsdale, Ariz.), predicted that growth in the U.S. gross domestic product (GDP), a key indicator of consumer buying power, would be as low as 1.5 percent this year, down sharply from the 3 percent figures recorded a few quarters ago.
McClean added that the global GDP figures are going to come in this year at 2.8 percent, just a whisker above the 2.5 percent figure that is considered the benchmark for defining a worldwide recession. "We are flirting with that," he said.
The economy watch — earnings announcements followed by layoffs followed by forecast revisions — has taken on an almost gruesome fascination, akin to watching a plane spiral toward a wheat field. Corrigan, for one, seems tired of the ritual.
"It's worse than '85, yes, but the real story is the recovery," he said. "The more aggressively people are fixing inventories, the sooner they get back to health. It's an inventory correction in a background of people managing inventory much better than they did 15 years ago."
The factors leading to the collapse of 2001 are well documented but varied: a delayed Y2K purchasing binge early last year after the scare passed, triggering a sharp cutback in purchases later; the collapse of the dot-com world; some silicon overcapacity, and now the energy crunch.
Rodgers, for one, argued that the macroeconomic effects won't be so onerous on the semiconductor industry. While he acknowledged that some midsize companies in California will be hurt by the electric-rate hikes, he said most companies are in a position to conserve power based on their size and potential for efficiencies. Moreover, the effect on the semiconductor sector in California will be minimal because there is little manufacturing left in a state Rodgers called expensive and "hostile."
"I can buy power in Texas and Minnesota [where Cypress has fabs] for one-third of what I pay in California, and I don't have to kiss anybody's ass to get it," he said.
Equipment doldrums
The semiconductor slump has had a domino effect on semiconductor equipment sales. Equipment giant Applied Materials Inc. (Santa Clara, Calif.) has reported that sales in the second quarter slipped 30 percent, and executive vice president David Wang said he's not expecting them to revive for a while, given that some foundries are running at just 50 percent utilization. New orders for chip-making tools are down 44 percent from last quarter and 54 percent from this time a year ago, Wang said.
"This downturn is, in my recollection, the steepest and sharpest cutback in equipment spending we've ever seen," said Jim Morgan, chairman and chief executive of Applied Materials. "There are macroeconomic issues that are continuing to affect our industry."
Cypress' Rodgers argued that one factor sometimes cited as prolonging the slump — the shift to 300-mm wafer manufacturing, with its attendant increase in wafer real estate — is hyped. The increase gained by wafer enlargement is roughly equal to that of a routine process shrink, he said. Also, overcapacity in the industry is less than it was during the 1996-98 cycle, said Rodgers. And on the upside, prolonged overcapacity creates cheaper ICs and eventually, people find the low prices irresistible.
If Rodgers sees any one factor as central to the downturn, it's the unprecedented falloff in demand in three major end markets simultaneously: telecommunications, wireless handsets and personal computers.
"The dumb guys were the venture-capital community," he said. "Their overinvestment in the dot-com sector led to overinvestment in telecommunications equipment, much of it financed by the equipment vendors themselves. Now the Cisco boxes piling up in warehouses have to be sold before Cisco will turn the lights on again for the silicon vendors.
"It's a free economy, and you have the right be stupid. In a free economy you take the responsibility to pay for being stupid," Rodgers said.
Historical trends suggest the year after a big slump is one of recovery. In 1986, the chip sector grew 22.7 percent. Nobody is expecting that kind of gain in 2002, but analyst McClean predicted next year's figure will be in the high teens, while LSI's Corrigan thinks it could crack 20 percent.
There are already some signs of light. The PC segment, one of the first areas to feel the slowdown last fall, is now starting to see increased sales. And going into the summer months, in preparation for the back-to-school buying sprees, memory sectors are starting to ship more DRAM devices to PC OEMs.
'At the bottom'
"I would like to think we are at the bottom," said Fred Waddel, director of sales for Micron Technology Inc.'s computing and consumer group (Boise, Idaho).
Waddel said that most PC OEMs were bracing for a shortage of DRAMs last fall, and stocked up on parts in anticipation of holiday sales. When that traditionally big sales period turned out to be flat, they were left with too many memory chips on hand. But most burned through that inventory in the first quarter, he said, and now are buying to meet current demand. As soon as that demand picks up — and Waddel said early signs indicate it is — so will sales for the overall memory segment.
In an apparent anomaly amid the high-tech slowdown, the world's largest country is turning out to be a solid market this year, according to recent data. "China has a huge domestic market for PCs, mobile phones and consumer electronics, which includes goods like DVD players," said Dorothy Lai, a senior analyst with Gartner Dataquest in Hong Kong. "Demand from this market continues to be strong, which explains why China will buck the overall industry trend."
China's IC industry is expected to grow a respectable 6.3 percent this year, analysts said.
With the exception of the telecom equipment market, Corrigan disputed the notion of a three-sector collapse. Handsets sold more than 400 million units last year, though down about 20 percent from earlier forecasts, and he said consumer is LSI's strongest business right now.
Since this downturn echoes 1985 only in its severity, Rodgers and other executives waved off requests for lessons from the past. "You do what's appropriate when the roller coaster is going up and do what's appropriate when it's going down," Rodgers said. |
