Is that light at the end of the tunnel?
By Will Wade and J. Robert Lineback
SAN JOSE -- The semiconductor industry is beginning to think it sees the start of a turnaround, but it is still too shell-shocked to believe it. Market observers say it's still too early to declare a bona fide recovery is in the making, but they do see a clear rebound from the depth of the slump last July.
"The tea leaves seem to be indicating there was some nascent strength in the market during the third quarter," observed Silicon Valley analyst Ed Henderson of Henderson Ventures in Los Altos, Calif. "We have seen some pickup in the printed-circuit board demand, for example. Semiconductor orders have picked up two months in a row. Some of this could be seasonal, but we seem to be heading toward a slow recovery," he said.
The next piece of evidence that people are looking for now is a move to higher average selling prices for semiconductors. This is particularly true for DRAM prices, which have declined dramatically for the past three years because production capacity outstripped growing worldwide demand.
Now, major DRAM makers -- led by NEC Corp. and Micron Technology Inc. -- have started to test the recovery waters by increasing the prices of 64-Mbit memory prices by about 10% after several vendors began scaling back production this past summer.
"That's a marketing experiment," pointed out Michael L. Hackworth, chairman and CEO of Cirrus Logic Inc. in Fremont, Calif. "If the pricing [increase] holds, it means that capacity utilization has bottomed out," said Hackworth. "The second half is going to be better than we had feared it would be."
But like many Silicon Valley executives, Hackworth is now waiting to see if the improvements are just seasonal or whether the rebound has staying power. He currently believes the improvements will lead to a mid-1999 recovery.
The third quarter may have ended the downturn, but "the question is when will we see the beginning of the upturn?" asked Jean-Philippe Dauvin, vice president and chief economist at ST Microelectronics in Paris. But he is optimistic and believes that all of the conditions appear to be falling in place for a modest upturn in the fourth quarter.
"If so, it will be the first [sequential] increase we've seen in six quarters," said Dauvin, who was just named president of the World Semiconductor Trade Statistics (WSTS) organization that keeps the official market numbers for most industry trade associations.
The battered chip makers and their capital equipment suppliers could certainly use some good news after 1998 turned out to be such a big disappointment. First, the Asian financial crisis turned out to have a much bigger impact on the chip industry than expected at the start of the year. Chip vendors also saw some of their markets change in 1998 with such shifts as a boom in low-cost personal computers, which drove down chip prices.
As a final shock, an acceleration of device shrinks -- aimed at cutting costs -- ended up dumping more products onto an already flooded market, according to industry observers.
One troubling trend in the 1998 slump is weak unit shipment growth, said Jim Feldhan, president of Semico Research Corp. in Phoenix. "We are expecting only 1.3% unit growth this year, which is very weak considering the fact that prices are down," the analyst noted. "Usually, when prices drop, unit shipments go up."
Slow end-equipment market growth and chip integration have reduced the chip unit growth this year, he said. IC volumes will increase by about 8% in 1998 but could be in the 20% growth range in 2000.
But coming up with industry forecasts for next year is proving to be a trickier job than usual. ST Microelectronics' Dauvin said he was still finalizing his own 1999 forecast at the end of September because he wanted more economic data from several key countries, in particular the United States and Germany, which is in the process of installing a new government under chancellor-elect Gerhard Schroeder of the Social Democrat party.
The European chip executive is maintaining a cautious stance at this point. "Right now, it looks like a 5% to 8% global growth year compared to -3% to -5% in 1997," said Dauvin, who believes a full-blown chip recovery will begin late in the second quarter next year after a somewhat flat first quarter.
The annual wave of fall forecasts did start, however, and Dataquest, at the end of September, was the first to issue its prediction. But the uncertain San Jose market researcher wasn't taking any chances, and issued two different forecasts: one based on the assumption of a 29% recovery in DRAM revenues, and the other leaving out the erratic memory chip segment altogether.
If such a solid rebound in DRAMs does occur -- that would be rising from $14.3 billion this year to $18.5 billion in 1999 -- Dataquest expected that worldwide chip revenues will grow about 12%, from $139 billion in 1998 to $155 billion next year. For this year, the market researcher predicted that total global semiconductor revenues would fall by 6%. If DRAMs are taken out of the forecast, semiconductor revenues will reach $24 billion in 1999 -- about a 10% increase, Dataquest predicted.
Another problem in making 1999 forecasts now is trying to figure out how much of an impact consolidation in DRAMs will have on capacity and memory pricing next year. "This is the big question in 1999," said Dauvin, referring to the merger and acquisition activities that could leave the industry with four DRAM suppliers controlling two-thirds of the market (see story in the Sept. 15 publication). "I continue to think the overcapacity in DRAMs stands at 25%," he said. "I am convinced that the DRAM industry is going through a consolidation." But he believed the impact of that consolidation will not likely be felt until the third quarter of 1999.
When DRAM markets do recover, the impact will be felt on other IC segments, according to analyst Bill McClean, president of IC Insights Inc. in Scottsdale, Ariz.
"An indirect relationship between the health of DRAMs and other IC segments has emerged," he maintained. "If the DRAM business picks up, it takes away some of the incentive for memory makers to target system-on-chip products and logic. Samsung, for example, has been pushing harder to offer foundry services," McClean noted.
Dauvin also believes healthy DRAM suppliers will also stay out of other memory markets, such as flash. "The DRAM consolidation will certainly help many semiconductor segments in the coming years," he added.
But for now, many chip makers are still adjusting themselves for slow growth and reduced revenue streams after a rocky nine months in 1998. The latest round of layoff announcements in late September is coming at a time when some executives are beginning to become more optimistic. Cirrus Logic, for example, announced in late September that it was laying off 500 workers and restructuring its fab capacity in a move to return to a full-fabless model.
"Confidence is improving," said Cirrus chairman and CEO Hackworth, who remains cautious. "We see the light at the end of the tunnel. We worried at first that it was a train, and now we are pretty sure it is not."
But there won't be any quick action by chip makers to rehire laid-off personnel or restart postponed or canceled fab projects, even if conditions continue to improve, industry analysts believed. "Everyone has decided to adjust themselves for the worst," said analyst McClean of IC Insights. "If things pick up a little in the fourth quarter, they probably can make adjustment with the people they have, but if the recovery continues, we'll see hiring again. If the markets do take off, we'd have a classic case of mistiming because companies would have to rehire all the people they were walking to the door."
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