Semiconductor Makers Warn Of Dismal Results In Wake Of Asian Woes
Dow Jones Online News, Monday, July 06, 1998 at 00:03
(Published on Sunday, July 05, 1998 at 20:58)
By Dean Takahashi, Staff Reporter of The Wall Street Journal
Semiconductor makers have sunk into a broad-based global slump,
caused by problems in Asia, a glut of production capacity and pricing
pressures brought on by lowcost personal computers.
The downturn, which has spread to nearly every category of chip maker
and their equipment suppliers, was brought home last week with a flurry
of profit warnings, layoff notices and sales data.
The Semiconductor Industry Association on Wednesday said world-wide
chip sales in May fell nearly 13% from the year-earlier period to $9.99
billion, the lowest monthly sales level since February 1995. The SIA,
the industry's dominant trade group, is now predicting chip sales to
decline 1.8% this year, compared with its forecast last fall of 17%
growth. Market researchers Pathfinder Research Inc. and VLSI Research
Inc. predict 1998 sales will be down nearly 10%. Some analysts don't
foresee much growth until 2000.
Silicon Valley companies that have laid off workers or issued
warnings about second-quarter results include National Semiconductor
Corp., Atmel Corp., Cypress Semiconductor Corp. and Seeq Technology
Inc., which projected a quarterly loss on Thursday. Among equipment
makers, victims include Applied Materials Inc., Lam Research Corp.,
Novellus Corp. and KLATencor Corp., which also on Thursday forecast a
disappointing quarter.
Even mighty Intel Corp., despite its near monopoly on the computing
engines for PCs, has projected a flat second quarter and lower profit
margins. The company, hurt by falling prices on its microprocessor
chips, on Thursday said it would shut two manufacturing plants in Oregon
for eight days to help reduce inventory of older chips and temporarily
idle 1,700 workers. Intel also said it would begin offering some workers
voluntary-severance packages, though a company spokesman denied rumors
that it is trying to cut more than the 3,000 jobs it said it would
eliminate via attrition and layoffs in April.
Changes in PC buying patterns have left chip makers with too much of
the wrong kind of products, causing them to dump inventories at
fire-sale prices. The mismatch of supply and demand has been
exacerbated, in some cases, by the emergence of Taiwan as a major world
production center, adding to the factories making chips in the U.S.,
Japan and South Korea.
"People expected the inventory correction to end in the second
quarter, but that didn't happen," says Donald Brooks, president of
Taiwanese chip maker United Microelectronics Corp. "I am not
particularly optimistic about the next 12 months, except for a light
seasonal growth in September."
As a result, chip makers have called off an expected $25 billion in
spending on new plants and equipment in the past nine months, estimates
George Burns, an analyst at Strategic Marketing Associates in Santa
Cruz, Calif. He puts capital spending this year at $35 billion, down
about 15% from $41 billion spent last year; spending in Korea is slated
to drop by 57%, by 23% in Japan, 11% in the U.S. and 4% in Taiwan.
In contrast to previous downturns, U.S. companies are among the
hardest hit. In 1996, a plunge in chip prices was mainly felt by
Japanese and Korean makers of the most widely used memory chips, known
as dynamic random access memories. But that was good for Intel and many
makers of other chips, as lower PC prices stimulated market demand.
The DRAM market is being squeezed again. This time, though, there are
the Taiwanese manufacturers to push prices down even faster. Chips that
cost $3 at the beginning of the year now sell for less than $2. With
costs estimated at $2.50 a chip, some DRAM factories could be losing $5
million a week, says Dan Hutcheson, president of VLSI in San Jose,
Calif.
In response, some DRAM makers have expanded into chip markets led by
American companies, such as so-called flash memory chips sold by Intel,
Atmel and Advanced Micro Devices Inc. That competition has hurt prices
in those markets.
Late last year, the Asian financial crises began to affect chip
buyers there as well as makers. Doug Andrey, analyst at the SIA, notes
that sales in Asian countries were roaring during the industry's 1996
downturn. Now, currency fluctuations and other problems have caused
Asian consumers to slow purchases of PCs, cell phones and other products
that consume chips widely produced in the U.S.
At about the same time, U.S. PC buyers began to gravitate toward
machines that started at just under $1,000, driving down the prices on
Intel's microprocessors and logic chips that manage graphics and other
PC functions.
PC prices continue to sink, as consumers find they can live without
the latest speed increases the industry can deliver. Integrated Device
Technology Inc., a company that makes low-end equivalents of Intel
microprocessors, this week said the first shipment of a new line of $500
machines based on its chip sold out immediately in five stores.
"Everybody's take gets cut in half on the $1,000 PC," says T.J.
Rodgers, chief executive officer at Cypress Semiconductor Corp., a San
Jose, Calif., company that eliminated about 240 jobs in the past
quarter. "We're going to have to live with that and get on with our
lives."
Makers of semiconductor manufacturing equipment are in equally dire
straits. Lam, one of the biggest tool makers, on June 24 said it will
lay off as many as 1,200 workers, or 20% to 25% of its work force, even
after numerous temporary shutdowns this year. James Bagley, its chief
executive, said in a conference call with analysts that the industry was
in the worst shape he has seen.
Analysts say there is some hope. The industry could rebound somewhat
in the third and fourth quarters if new software such as Windows 98 and
new graphics hardware technologies spur stronger PC demand. In memory
chips, cutbacks in production and new, higher-capacity chips at some
point will bolster prices again. But it is too early to say when.
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