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Chip companies mobilize for speed war

Communications chipmakers say they continue to feel increased competitive pressure in the midst of an industrywide slowdown.

    SAN JOSE, Calif.--Communications chipmakers said they continue to feel increased competitive pressure in the midst of an industrywide slowdown that could signal tough times for several companies in the market.

    Companies like Vitesse Semiconductor, Applied Micro Circuits, Motorola, Agere Systems and Intel have announced more details of their technology plans at this week's Network Processors Conference here as shrinking demand in the industry has many asking if the urge to upgrade has faded.

    On the minds of several companies is a set of new chip technologies that can handle network traffic at rates of 10 gigabits per second (gbps), about four times faster than the current standard, and more than 178,000 times faster than a standard 56kbps dial-up modem. But some industry observers say that while the market looks promising, it will be very hard for some of the niche chipmakers to conquer.

    "The segment will be very crowded and there's not enough room for all vendors so there's going to be some pretty tough competition," said principal analyst Lindley Gwennap of the Linley Group, who spoke at the conference.

    The chip sector as a whole has been battered over the past few months. Semiconductor sales worldwide fell 42 percent in August of this year to $10.49 billion from $18.08 billion in August 2000, according to data recently released by the Semiconductor Industry Association.

    The combined North and South American market was hit the hardest, falling 55.3 percent in August vs. the same time last year. That compares with a 40 percent European drop and declines of 36.3 percent and 31.7 percent in Japan and the Asia-Pacific region, respectively.

    Last week, chipmaker PMC-Sierra reported that third-quarter revenue dropped 69 percent to $61.6 million from $198.2 million, and PMC also said it would cut 24 percent of its work force and close engineering projects so it can refocus on its top 17 customers. Agere, which posted a net loss of $3.4 billion, including charges on revenue of $600 million, reported a 60 percent drop from $1.5 billion in the year-earlier quarter.

    Aside from the major chipmakers, many start-ups are angling for the 10gbps market, which increases the clutter at a time when all vendors will have to be more patient because business spending cuts have dampened gear makers' enthusiasm to make advanced equipment bets.

    Counting on demand
    Chipmakers still used the conference to tout their plans, counting on the demand for 10gbps to heat up so they can charge more for the added performance, therefore upping profit margins.

    Vitesse and Applied Micro Circuits gave conference attendees more details about their 10gbps chips. Vitesse said that samples for its IQ10GS family of processors will be available to gear makers in the first half of next year, while Applied Micro Circuits announced that nP7510 chip samples will be available in January.

    Other major communications chipmakers, such as Intel, Motorola and Agere, are also expected to introduce production samples sometime next year.

    But the race may not go to the swift. Equipment makers want chips from companies that can supply a broad product line so they have more selection, and they want solid development tools to make the software that runs the chips. Agere is one of several chipmakers that recognizes this need, announcing Monday that gear makers can now access software development tools for their upcoming chips, which gives gear makers time to iron out software issues before the actual chips arrive.

    Some industry insiders also point out that the first chips will probably not be sophisticated. Tom Riordan, a vice president at PMC-Sierra's MIPS processor division, says that the technology needs to evolve in order for chips to do more advanced functions at 10gbps.

    The first chips will probably only be able to receive data and forward it along to its appropriate destination. Gear makers will eventually want chips that can analyze individual data packets and make decisions based on that information--such as giving specific packets shipping priority over others.

    Even if some players seem to have an edge in the current market, the war will be fought on many fronts--including technology, manufacturing expertise and price--executives said.

    "In today's times it's not about time to market, it's about the particular flavor of time to market," said Dave Husak, the CTO of Motorola's C-Port group. "It's not good enough to be first, you have to deliver."