Global Chip Industry to Tread Water in 2002
Friday December 14 3:11 PM ET
By Duncan Martell
dailynews.yahoo.com
SAN FRANCISCO (Reuters) - The boom-and-bust semiconductor industry, closing out its worst year in decades, will at best tread water in 2002, analysts say -- bad news for investors who've pushed chip stocks higher on recovery hopes.
The industry, which tends to run in up-and-down cycles of about four years, traditionally has rebounded from downturns quickly.
But that may not be the case this time, analysts, market research firms and industry groups say. Analysts predict that growth won't resume in earnest until late next year at the soonest.
While the industry remains mired in downturn, stock market investors have boosted the semiconductor stocks by 50 percent or more from their October lows on hopes for a recovery. But analysts say that there are no signs of a big rebound anytime soon.
``The best we can do in 2002, I believe, is for it to be a flat year,'' said Needham & Co. semiconductor analyst Dan Scovel, adding that he expects industry sales to decline by as much as 5 percent. ``And the first signs of real life won't likely come until the second half of next year.''
Global chip sales first began to decline on a month-over-month basis last fall. The industry saw sequentially declining revenues in each month from November 2000 to September of this year, plagued by a slowing U.S. economy that gave way to a recession earlier this year.
The Semiconductor Industry Association's influential annual forecast sees global chip sales plunging 31 percent this year from some $200 billion in 2000. That would be the worst-ever decline, easily eclipsing the 17 percent tumble in 1985.
WORST IS BEHIND THE INDUSTRY
Now, following thousands upon thousands of job cuts at chip companies around the globe, the worst seems to be behind the industry, with some faint signs of seasonal strength in the fourth quarter, the industry's strongest due to holiday sales.
Both Intel Corp.(Nasdaq:INTC - news), the world's largest chipmaker, and its rival Advanced Micro Devices Inc. (NYSE:AMD - news) have boosted their sales forecasts, suggesting that holiday sales of PCs may not be quite as grim as many had feared.
Taiwan Semiconductor Manufacturing Co. (2330.TW) (TSMC), the No. 1 contract microchip maker, said Dec. 3 it expected fourth-quarter net profits to jump more than 150 percent from the third quarter.
Typically, sales in the first quarter fall off after the holiday-fattened fourth quarter, and this time should be no exception, analysts said. The question is how much of that strength, if any, will persist, even after accounting for a drop-off in sales following the New Year.
``The question is will the strength or stability we see now remain as we exit the year,'' Scovel said. ``The first half of the year doesn't have much seasonal support, so I think we're going to rumble along the bottom here.''
Global chip sales are forecast to rise a modest 6 percent in 2002, according to the SIA, an estimate some analysts consider overly optimistic, and then increase by 21 percent in each year through 2004. Chip sales actually ticked up by 2.5 percent to $10.4 billion in October from September.
PCs and computers account for about 45 percent of total semiconductor revenues, and more than 100 million PCs are shipped each year. If that industry is hurting, it damages the overall sector.
OTHER SIGNS OF STABILIZATION
In addition to Intel and AMD, there are other signs of improvement, or, at least, stabilization.
TSMC Chairman Morris Chang said fourth quarter capacity utilization -- the percentage of a chip plant being used -- is likely to rise by several percentage points in the fourth quarter after falling throughout the first nine months of 2001 to 41 percent by the third quarter.
It was signs like these indicating that TSMC may be at the forefront of a global tech recovery that made it attractive to JPMorgan Fleming's David Atkinson, who manages the $93 million JF global equity fund.
``That's why we own TSMC, because we believe that earnings hopefully will catch up with that company,'' he said.
As semiconductor companies reported third-quarter earnings, their sales forecasts have become less ominous, although still far from the heady days of 1999 and 2000 when revenues surged 30 percent or more quarter after quarter.
Texas Instruments Inc.(NYSE:TXN - news), the biggest maker of chips found in cellular phones, late last month reconfirmed its guidance that sales in the fourth quarter will fall about 10 percent from the third quarter, noting that it had begun to see signs of stabilization.
German chipmaker Infineon Technologies AG (NYSE:IFX - news)(IFXGn.DE) has given the faintest hint that memory prices, which have fallen 60 percent this year, may be stabilizing.
STMicroelectronics (STM.PA) , Europe's biggest semiconductor maker, reaffirmed its sales and gross margin forecasts for the fourth quarter, lending further credence to the theory that the bottom of the global downturn in chip sales is at hand.
NICHE MARKETS DOING WELL
Foundries, or contract chip makers, may help lead the industry out of the slump, beginning in the middle of next year, analysts said.
But the days of rapid 20 percent growth in the PC industry year-on-year aren't likely to return. The industry is maturing, and Microsoft Corp.'s (Nasdaq:MSFT - news) new operating system, Windows XP (news - web sites), hasn't been as big a demand driver as many had initially thought.
Still, the PC industry will grow at a respectable 10 percent, maybe as much as 15 percent, and other areas are likely be stronger within the semiconductor industry, analysts said.
Indeed, niche markets within the sector are doing reasonably well this year, despite the downturn, and will likely post respectable gains next year as well.
These include the market for flat panel displays, a small but quickly growing market. and DVD players which are enjoying strong sales this holiday season.
``DVD is doing well, digital cameras are doing well and video games are positioned to do well for the next several months,'' Scovel said, pointing to the recent launch of new video gaming systems from Nintendo (news - web sites), Sony and Microsoft.
Others point to gains next year in the beleaguered memory-chip segment, which includes dynamic random-access memory, or DRAM chips, and flash chips, which retain data when power to them is switched off.
Devan Kaloo, a fund manager with Aberdeen Asset Management Asia in Singapore, said he was betting more on the upside potential of DRAM stocks due to the alliance and possible merger between South Korea (news - web sites)'s Hynix (00660.KS) and U.S.-based Micron Technology Inc.(NYSE:MU - news), even as Aberdeen remains underweighted in technology stocks in general.
``Both TSMC and UMC are leaders in the foundry space and that has already been priced into their stocks, which have risen significantly year-to-date, but DRAM stocks are trading at much lower multiples due to the commoditization of the segment,'' he noted.
BOUNCING AROUND THE BOTTOM
The telecommunications and networking sectors of the chip market are still suffering from a build-up in inventory among their customers. Telecommunications companies have slashed capital expenditures to cope with expected demand that never materialized, said Hong Kong-based Merrill Lynch analyst Daniel Heyler, adding that excess inventories will remain an issue through the first half of next year.
But once that inventory is burned off in the entire industry, global economies start to expand again, sales growth and increasing profits at semiconductor companies around the world will follow. It just won't happen in 2002.
``The good news is we've hit bottom and the bad news is we're going to bounce around here for a while,'' Scovel said.
AdvocateDevil |
