Semiconductor industry pins hopes on recovery this year

The semiconductor industry has seen its fortunes slide dramatically in the last few months as a steep downturn in business hit the entire sector, but now some industry leaders think they can see a light at the end of the tunnel. How far away this light is, however, depends on who you talk to.

The turmoil of the past few months has been the result of a number of downturns hitting the industry at the same time. The slowdown in the U.S. economy drove down product sales, leaving companies with surplus chips – something that sent the DRAM (dynamic random access memory) market into a tail spin from which it has yet to recover – and the bursting of the Internet bubble also forced many companies to put the brakes on IT spending. All of this has the industry reeling.

Just this week Cypress Semiconductor Corp. warned that its revenue in the second quarter is likely to be around 30 per cent lower than last year. The company described the wide area network and storage area network segments of its business as “practically dead in the current quarter.” All of this came just under two months after the company reported that in the first quarter, almost every sale was matched with a cancellation.

Across the entire industry the story is similar, if not the same. Chip giant Intel Corp. reported a 64 per cent fall in first quarter revenues, Advanced Micro Devices Inc. said Q1 revenues fell 34 per cent and memory chip interface designer Rambus Inc. said in its recent conference call that it expects the DRAM market to continue sliding.

The industry is reacting to the harsh business climate with layoffs and reorganizations. Earlier this week ST Microelectronics Group said it would close its Ottawa plant with the loss of 450 jobs and Texas Instruments Inc. (TI) said, according to the Associated Press, that it plans to idle two Dallas factories while the current conditions continue. TI has already announced 2,500 layoffs this year, Intel said it plans to slim down by 5,000 people, Motorola Inc. announced 4,000 job cuts to be carried out during the year, LSI Logic Corp. said 500 would lose their jobs as it shut a factory and NEC Corp. delivered the same news to 700 of its staff in California.

“There’s a general slowdown in the industry,” said William Siu, vice-president and general manager of Intel’s desktop platforms group, speaking at the Computex exhibition in Taipei earlier this week. “In the first quarter of the year we believe that we’re seeing the bottom of the cycle, but it just depends on the economic conditions of both the U.S. and around the world.”

“I’m not sure anybody in the industry today can actually forecast or have the guts to go forecast a year out. I think the industry is very dynamic now.”

A number of industry watchers are sticking their necks out and forecasting a coming recovery.

The Semiconductor Industry Association (SIA) began predicting a month ago that the market will recover this year. “We continue to believe that the industry will complete the inventory correction in the third quarter and the recovery will commence in the fourth quarter,” said George Scalise, SIA president, in the group’s monthly market commentary on May 2.

World Semiconductor Trade Statistics Inc. (WSTS), a semiconductor market analyst, concurred on a rebound later this year when it published its latest report earlier this week. The group said the downturn in semiconductor sales should come to an end by the middle of 2001, and the third quarter of the year should offer positive growth in all major global markets and product segments. Microcomponents and memory chips will lead the market rebound, the WSTS said.

Many have their hopes set on the period around September and October, when many schools in the western hemisphere return from summer break.

“The real yardstick is going to be in the July time frame when we see whether the market will come back with the back-to-school season,” said Raymond Lee, vice-president of Asia Pacific at AMD Far East Ltd., in an interview at Computex.

Hector Ruiz, chief executive officer (CEO) of AMD, was a little more upbeat at a news conference in Tokyo on Wednesday. He reported the company expects to see the personal computer market return to normal in the fourth quarter of this year.

Others don’t hold out hope of a recovery until sometime next year.

“We expect to see a sequential increase in the first and second quarters of 2002 over this year, but there are a lot of uncertainties as to when the recovery will begin,” said Michael Dell, CEO and founder of Dell Computer Corp. speaking in Hong Kong one month ago. He added that the market was very difficult to judge: “I do know that Dell will be growing faster than the market, we just don’t know where the market will be.”

The DRAM market, which has seen prices for commodity 64M-bit DRAM chips drop from around US$9 per chip in mid 2000 to around $1.50 at present, could take even longer to bounce back. Reliant on a recovery in the PC market, some major DRAM makers see hard times ahead for a good part of the next 12 months.

“The launch of Windows XP is a real opportunity to stir up DRAM demand but I don’t think (an increase in demand) will come until at least the third quarter of 2002,” said Ilung Kim, vice-president of memory marketing at South Korean memory chip maker Samsung Electronics Co. Ltd., speaking at Computex.

Sumner Lemon, Taipei Correspondent, and Stephen Lawson, Hong Kong Correspondent, contributed to this report.

Cypress, based in San Jose, Calif., can be reached at Intel, in Santa Clara, Calif., can be reached at AMD, in Sunnyvale, Calif., can be contacted at Rambus, in Los Altos, Calif., can be reached at Texas Instruments, in Dallas, can be reached at NEC, in Tokyo, can be contacted at LSI Logic, in Milpitas, Calif., can be contacted at Samsung Electronics, in Seoul, can be contacted at