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Chips pounded by supply, Asia crisis

Global semiconductor sales slumped by 12.7 percent in May, a consequence of Asia's economic slowdown and a worldwide glut in both microprocessors and memory.

    Global semiconductor sales slumped by 12.7 percent in May, a consequence of Asia's economic slowdown and a worldwide glut of both microprocessors and memory, the core chips used in computers.

    Yesterday's news that Intel will furlough 1700 workers at two Oregon manufacturing plants for nine days confirms that even the microprocessor giant isn't immune to the collection of forces that have hit the chip industry in 1998.

    May chips sales totaled $9.99 billion, down from $11.46 billion in May of 1997, according to World Semiconductor Trade Statistics figures released by the San Jose, California-based Semiconductor Industry Association (SIA). May sales were also down 3.9 percent from April 1998 revenues of $10.40 billion.

    The decline touched all four marketing regions--the Americas, Europe, Japan, and Asia-Pacific--with Japan and the Americas falling by 19 and 17 percent, respectively, on a year-by-year basis.

    The Asian financial crisis continues to be a prime factor in the slide, according to the SIA. The trade group earlier projected that more than half of this year's expected $3 billion contraction in Japan, the world's second-largest computer market, will come as the result of the currency troubles.

    Of course, currency problems have also hit other countries in Asia, whose economic straits have in turn compounded the general malaise Japan has suffered over the last few years. Combined, Asia-Pacific and Japan make up more than half of the world's chip sales, according to SIA's numbers.

    "A number of observers were optimistic that it [the financial crisis] would be a one or two-quarter event, but those predictions haven't quite come true," said SIA spokesman Jeff Weir. "There are clear dynamics of the marketplace being felt in semiconductors."

    Meanwhile, oversupply continues to depress prices. Unit sales are actually climbing, but price cuts are moving faster, leading to falling revenues. The problem is particularly acute in memory, where South Korean manufacturers such as Hyundai, LG Semicon, and Samsung have temporarily shut down manufacturing operations in an effort to correct the imbalance. The Japanese have decline to follow, although they have said they are planning for slow growth.

    Some of these Asian firms tried to cut back on production in the fall of 1996, without much success. "If you stop putting chips in the market somebody else might," Weir summarized.

    Memory prices for the desktop standard 16-megabit chip have fallen some 90 percent in the past three years, to the point where prices are at or below the cost of manufacture, according to several sources.

    Earlier this year most of the major Japanese and South Korean manufacturers announced plans to curtail capital spending on next-generation facilities, because companies are loathe to run manufacturing plants at less than full capacity. Even newcomers in Taiwan have stopped investing in capital equipment, according to Mark Guidici, director of semiconductor supply and pricing service at Dataquest.

    "With capital spending being slowed to a crawl and demand steady in unit volume, the estimated demand catchup to supply is about 12 months," he said.

    Fujitsu even said it was considering getting out of the business altogether before backing away from the idea earlier this week.

    The problem has also reached microprocessors, where the popularity of low-cost PCs continues to depress the market. Profit margins on sub-$1,000 systems are very low, meaning PC vendors and in turn component makers have been earning less and less even though unit sales are climbing.

    Yesterday, Intel said it would curtail production over the next week in an effort reduce supplies; in as much as the company provides about 85 percent of the industry's intelligent "logic" chips, the effort is more likely than memory cutbacks to be effective, observers agreed.

    Still, the step is unusual for the Santa Clara, California, company. "The oversupply situation that we've been experiencing is definitely showing up in some of the companies that have been able to weather the storm," Guidici said.

    "It just proves that even the best of companies are not immune to this kind of thing, primarily because the current level of the consumer market is satisfied with the level of performance they're getting for the lower level of cost," he said.