Clouds put damper on growth forecast....................................
techweb.cmp.com
By Margaret Ryan
NEW YORK -- Robust IC sales--rising 10 percent to 17 percent above 1997 levels--will contribute to what most economic forecasters believe will be a continuation next year of the U.S. economic expansion that's prevailed for the bulk of the decade. Forecasters see a strong economy at least through the first half.
Even as they make that prediction, however, analysts and economists warn that the global boom is nearing an end and that companies should prepare for a period of slower growth and lower profits.
Certainly, the rumblings this fall in the global financial markets--notably in Japan and the Asia-Pacific--have sounded an early alarm. Uncertainty at home over the course of interest rates, the appreciating U.S. dollar, the assertions of an information-technology labor shortage and the risk of inflation further cloud analysts' and economists' forecasts.
Businesses that derive a large portion of their revenue from Asia are likely to see an impact on sales, forecasters said. And with the devaluation of some of the region's currencies, U.S. companies may find that their products are less price-competitive in world markets.
On the upside, domestic interest rates and unemployment rates are low, and inflation has been kept at bay. Those factors should make for a strong economy early next year.
What happens beyond that will depend in part on the Federal Reserve's actions. Economist Joel Stern, managing partner at Stern Stewart and Co. (New York), believes interest rates will remain in check through midyear. But the economy is growing too fast, Stern said, and that could lead to inflation late next year.
A more immediate concern, according to some economists, is weak demand for U.S. exports.
Lower U.S. exports
Economist John Huizinga, a professor at the University of Chicago's Graduate School of Business, forecasts a 14.2 percent drop in real net exports for 1998 as the U.S. dollar appreciates against devalued East Asian currencies, making U.S.-produced goods more expensive on world markets. The export slide has already begun: In the third quarter, U.S. real net exports fell 21.6 percent.
Nonetheless, Huizinga believes domestic demand will be sufficient to expand the U.S. economy by 2.5 percent in 1998-provided the United States has the productive capacity to meet the demand for goods and services.
Labor shortages could threaten that productivity. The domestic unemployment rate stood at 4.7 percent in October--the lowest it's been since October 1973, when it was 4.6 percent. And the tight labor market--a problem that some experts say is approaching crisis proportions in the technology sector--threatens to constrain productivity.
"Unless there's a surge in productivity," Huizinga said, 1998 could be a "year of rising real interest rates, an appreciating U.S. dollar and the end of the stock-market boom."
While economists fret about monetary policy, electronics executives worry about the bottom line. Market-research analysts are generally optimistic about next year, though Wall Street analysts who track electronics-related stocks are less upbeat.
Market researchers expect the U.S. electronics industry to do better in 1998 than in the two preceding years. One theory posits that South Korea's crumbling economy will force Korean companies to put fab-expansion plans on hold; that would ease overcapacity and stabilize average selling prices for memory chips.
Jim Handy, Semiconductor Group principal analyst at Dataquest Inc., a Gartner Group research arm, predicts IC sales will increase 16.7 percent in 1998 (compared with this year's 5.6 percent growth) as IC-fab investments fall and DRAM prices rise. The overall IC market will total $149.7 billion in 1997 and $175 billion in 1998, Dataquest predicts. Handy expects memory-chip revenues of $39 billion, up 18 percent from $33 billion in 1997.
Vladi Catto, corporate economist at Texas Instruments Inc., also said 1998 will be strong. "We have a recovery in progress," Catto said, "and that recovery is going to benefit segments of the semiconductor industry that feed wireless communications, networking and, to some extent, the computer industry, because the PC industry is growing at 15 percent to 20 percent."
Catto doesn't expect the financial crisis in east Asia to depress IC sales. He acknowledged the impact of the financial crises in Thailand, Malaysia and Indonesia but noted that Taiwan and China are healthy. And he believes the International Monetary Fund's recent imposition of restrictions on Korean capital investments "could actually help the semiconductor industry" by closing the gap between supply and demand.
But Thomas Kurlak, chip-industry analyst for Merrill Lynch, believes the industry is grinding toward a period of "sharply lower revenues," driven by the overcapacity and oversupply
situation (which has weakened chip pricing) and by the PC market's focus on producing "economy" models (which may slow consumption of high-end chips). He further cited the soft Asian market.
Kurlak noted the rash of disappointing third-quarter earnings results among technology companies. "If you look in every segment--wireless, datacom, PCs and workstations--you see a growing list of companies that aren't doing well, and chip vendors will get hurt."
It will be another year before the situation improves, Kurlak said. In the meantime, expect poor quarterly earnings reports, layoffs and capital spending cuts.
Short on capital
Indeed, the semiconductor capital-equipment market has softened in the second half. Soon after the first reports surfaced of Asia's financial troubles, UBS Securities semiconductor-equipment analyst Mark Fitzgerald lowered his projections for 1998 equipment sales from 11 percent growth to none. (He also cut his 1998 chip-market growth predictions from 16 percent to between 10 and 12 percent.) And Fitzgerald believes the flat equipment market will persist in 1999.
Some equipment makers, Fitzgerald said, have already seen promised orders fail to materialize. Hyundai, for one, has pulled back from a planned expansion that would have increased Applied Materials' fourth-quarter revenue.
Dataquest's semiconductor equipment and materials analyst, Ron Dornseif, expects Korean chip companies to trim capital spending 20 percent from 1997 levels and Japanese chip companies to cut capital spending by 5 percent to 10 percent. But he believes sales will be flat to slightly up in Europe and up by as much as 10 percent in North America.
Equipment for 300-mm-wafer production on pilot lines will be among the stronger sellers, according to Dornseif. But the equipment industry is driven by capacity buys, and those won't pick up until the fourth quarter of next year or early in 1999.
Dataquest's view of the semiconductor-equipment industry differs from that of the major trade association that represents the segment. Semiconductor Equipment and Materials International (SEMI) hasn't revised its initial forecast for 1998, nor has it said what impact, if any, Asia's financial problems may have on equipment sales next year.
In early December, SEMI released a Consensus Forecast--based on input from 99 member companies in the United States, Japan and Europe--that forecasts the segment's return to double-digit growth in 1998. SEMI expects a worldwide market of $31.6 billion, up 11.6 percent from 1997. In the same survey, SEMI members said they expected 1997 shipments to come in at $28.3 billion, up 7.7 percent from the record $26.3 billion shipped in 1996.
UBS's Fitzgerald lowered his equipment estimates back in October, but said the firm hasn't yet determined what kind of secondary impact the financial troubles in Asia will trigger.
"Will the economic problems overseas cause U.S. businesses to be more conservative?" he asked. "Boeing received cancellations for plane orders from Asian carriers; does that mean Boeing won't buy computers for planes? What kind of impact would that have on the economy? We haven't factored secondary things like that in yet."
End-user markets
Data from end-user electronics markets indicates that there could be some impact on sales of consumer electronics, personal computers and wireless-communications equipment.
Dale Ford, principal analyst for consumer electronics at Dataquest, expects the market for audio, video, personal electronics and appliances to increase by 4.4 percent next year, to $169.4 billion. That would come on the heels of modest growth in 1997.
Ford nonetheless conceded that the economics of the Asia/ Pacific region could change his forecast. "We were expecting Asia to become a larger consumer of consumer electronic devices [in 1998]," he said, "but now that's uncertain."
Search for consumers
For instance, the industry counts on Japanese consumers to be early adopters of new electronics products, but the country's financial woes could prompt consumers to spend more conservatively.
The consumer segment's best bet in Asia next year may be China, which consumes 90 percent of the world's output of video CD players and is seeking to exert greater influence on the global electronics market.
Back home, Ford noted any upward ratcheting of interest rates could spell trouble for the U.S. market for DVD players, large-screen TVs and other "home theater" equipment, since many consumers use credit cards to make such purchases.
That could play havoc with the semiconductor industry. For now, however, Dataquest is predicting that the market for consumer-electronics chips will total $26.5 billion in 1998, a 9.8 percent increase over 1997's $24.1 billion market.
On the PC front, the turmoil in Asia prompted International Data Corp. (Framingham, Mass.) to revise its estimates for 1997 PC shipments for the Asia-Pacific region (excluding Japan) to 12.36 million units from 12.93 million units. The research firm also projected that PC unit shipments to Japan would be flat for 1997.
By contrast, Bear Stearns forecasts 15 percent to 20 percent unit growth through the year 2000, owing to declining component costs, expanding corporate and consumer demand, and growth in international markets. But the firm expects the United States and Europe, not Asia, to drive growth in 1998.
The shift to digital cellular and the expansion of communications services in developing markets should push revenue for wireless communications equipment to $42.5 billion in 1998, a 4.2 percent increase over 1997's $40.8 billion, according to Dataquest. The semiconductor market for wireless is projected to increase by 8.4 percent, to $11.4 billion. |
