Chips are on the move again

The forecast, released Wednesday by the San Jose, Calif., trade group, predicts that worldwide chip revenue will grow by 15.8 percent to $163 billion this year and will jump 19.4 percent to $194.6 billion in 2004.

The four-year forecast says that chip sales are accelerating again, following 2001's massive 32 percent decline in revenue and the subsequent minute growth last year.

The latest forecast is still somewhat lower than the SIA's February 2003 prediction, which called for growth rate of 19.8 percent and $169 billion in revenue this year, as well as a 20 percent increase to $206 billion in revenue next year. The group has been wrong before: It forecast in February 2001 that chip revenue would grow by 22 percent that year.

The SIA's latest forecast reads like the traditional growth pattern seen by the semiconductor industry. Chip sales typically grow for three years, and then contract for two to three years before starting to grow again. Indeed, growth rates in 2005 and 2006 will be much slower, at 5.8 percent and 6.6 percent, respectively, according to the SIA.

The recent downturn, which saw the industry's best year in 2000 followed by one of its worst in 2001, hit chipmakers hard. Following a peak of $204 billion in revenue in 2000, worldwide semiconductor sales shrank by 32 percent to $139 billion in 2001.

A full recovery will take a while. If the SIA's predictions hold true, chip revenue will not exceed 2000's peak until next year, and even then only by $2 billion, which works out to a relatively small percentage.

This time around, the revenue increases will come from a broad mixture of newer products, such as optoelectronics, and old standbys, including microprocessors for personal computers and digital signal processors (DSPs) for cellular phones and handhelds.

Optoelectronics, a category that includes lasers, image sensors and certain communications chips, will jump by 34.7 percent to $9.1 billion in sales in 2003, and grow 19.2 percent to $10.9 billion in 2004, the SIA said.

DSP revenue will increase by 25.9 percent to $6.1 billion this year and by 27.1 percent to $7.8 billion next year, the SIA said. Microprocessor revenue will grow 14.4 percent this year to $27.3 billion and 18.3 percent next year to $32.3 billion.

Flash memory revenue will leap by 42.7 percent to $11.1 billion in 2003 and nearly repeat the performance in 2004, rising 36.4 percent to $15.1 billion in 2004, the SIA said. Flash memory stores data in cellular phones and networking gear.

The increases in revenue are likely come from higher unit shipments and higher prices. As demand and factory utilization rates rise among chip manufacturers, supply should tighten, which will likely cause many companies to increase their chip prices.

The market for dynamic RAM, the memory used in PCs, shows a good example of what could happen. The notoriously cyclical DRAM industry was hit hard by the economic and PC market downturn of 2001. Manufacturers slashed prices in an effort to sustain sales in 2001 and 2002.

But in the latter half of this year, DRAM prices have begun rising, thanks to optimism about the future as well as smaller inventories. The SIA predicts that DRAM revenue will grow 7.9 percent to $16.5 billion this year and 35 percent to $22.2 billion in 2004.

Continuing its cyclical nature, DRAM revenue will shrink by 20 percent to $17.8 billion in 2005 and then rebound again in 2006, when sales should grow 30 percent to $23.1 billion, the SIA forecast said.

Most of the other categories tracked by the firm will level out in 2005 and 2006, the SIA predicts.