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Chip sales down, but not completely out?

A drop in inventory could lead to an upswing in the market by the second half of 2001, but we're still looking at a down year, a new report says.

Another researcher has joined the chorus of forecasters predicting a dip in the chip market this year.

Cahners In-Stat Group on Tuesday released a report that predicts worldwide semiconductor shipments will decline by nearly 11 percent in 2001. Meanwhile, worldwide semiconductor revenue for the year will also decline, by nearly 16 percent to $170 billion, the report says.

The report attributes the decline in revenue and shipments to slowdowns in the major markets for chips, including PCs and communications. The semiconductor market, on the other hand, had one of its best years ever in 2000, with revenues increasing by nearly 37 percent to $204 billion and unit shipments up nearly 25 percent.

But slowdowns beginning late last year have demand down sharply for products that use chips such as PC processors, leading to excess inventory in raw materials and finished goods, the report said. Reacting to market conditions, most chipmakers slowed production and are now waiting for inventories to be depleted.

Inventories are beginning to drop, which should make for an upswing in the semiconductor market in the second half of the year, according to the report. However, the market will still finish down for the year.

"Some people might call that the optimistic view. It is based on the assumption that things will get better by the middle of the year," said Steve Cullen, director of Cahners' Semiconductor Group. "If things don't start getting better, soon, it could be even worse than that."

PC makers, for example, have worked off most of their inventories. As a result, they will begin to purchase chips at higher rates, again to build new PCs. However, the communications market may not have worked off its entire inventory yet, Cullen said. The result will be that companies such as those that build cell phones will hold off on buying the chips that go into making those devices.

Chip swings
Actual and estimated growth in semiconductor shipments:

Year 2000 2001 2002 2003
  Revenue growth     36.8     -15.8     14.5     17.8  
  Unit growth     24.5     -10.8     11.7     16.5  
Source: Cahners In-Stat Group

Compared with communications, "The PC (market) is in a little bit better shape...(It) has at least stopped getting worse," Cullen said. "It may actually be getting a little better.

"Once the inventory is burned off, you're back to business as usual."

The growth rates cited by Cahners for 2001 are not set in stone. They could end up much lower if the U.S. economy continues to worsen or inventories in markets such as networking turn out to be larger than expected, Cullen said.

However, based on the current scenario, "next year will be almost as good as last year was, and by the time we get back to 2003, we should be rolling along again," Cullen said. "We don't expect there to be an extended downturn."

Cullen said Cahners believes the semiconductor market will begin to rebound in the second half of this year.

The market could even see shortages again if demand returns as quickly as it went away.

"As recently as the third quarter of last year, there really wasn't enough capacity," Cullen said. "A lot of companies have cut back capital expenditures (used to build new chipmaking facilities) if it does in fact recover quickly, we could get ourselves back into a capacity problem."