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Analyst: Chip recovery slight in 2002

The semiconductor market will begin to stabilize in 2002, but it isn't likely to see a full-blown recovery until 2003, according to market researcher Gartner.

After a devastating setback in 2001, the semiconductor market will need to go through a year of rehab before returning to better health, a research firm predicts.

The semiconductor market will start to stabilize and show minute growth in 2002, market researcher Gartner said in a new report issued Wednesday. But the market isn't likely to begin a full-blown recovery until 2003.

An already rocky 2001 was showing signs that it had reached bottom in the middle of the third quarter, but market matters went from bad to worse after the terrorist attacks of Sept. 11, analyst Richard Gordon wrote in the report. Most analysts had predicted the beginnings of a recovery in the fourth quarter.

Gartner predicts a continued freefall through the rest of 2001, with revenues for the semiconductor market as a whole coming in at $147 billion, down 35 percent from the year before.

The recovery won't begin until 2002, with a slight revenue growth for the year of 3 percent to $152 billion.

The market should return to more robust health in 2003, Gartner predicts, when revenue growth should hit 30 percent. That growth will likely be fueled by an improved economy that, in turn, drives PC replacement sales and by a long-awaited recovery in the communications market. Next-generation cellular networks, known as 2.5G and 3G, should also help boost overall semiconductor revenues, Gordon said.

The toll from the market's current decline has included layoffs, cost cutting and dreary earnings. It has also meant a reduction in capital expenditures--spending by semiconductor makers on the construction of new fabrication plants or on the refurbishment of existing plants.

Market conditions through 2001 and 2002 will force chipmakers to walk a tightrope, as they try to control their costs but not cut back capital expenditures so much that they hurt their ability to make enough chips in the future. Cutting capacity too much could lead to demand outpacing chipmaking capacity and thence to shortages in 2003, Gartner predicts.

"The slowdown in capital expenditure in 2001 will likely spill over into 2002, resulting in supply-side tightness in 2003, when a stronger demand side is expected to have returned to the market," Gordon said.

Many companies, including chipmaker Intel, have halted ongoing construction, put off plans to begin building new fabs (chipmaking plants) or closed older fabs in efforts to control costs. Chipmaker Intel, in one instance, put construction of a new plant in Ireland on hold, while Advanced Micro Devices announced plans last month to shutter two of its oldest fabs plants. At that time, analysts said that five major chipmakers, including Motorola and Texas Instruments, had announced plans to close at least one fab each.

The introduction of 300-millimeter wafers by most major chipmakers during 2002 may help offset some plant closings. The wafers, which are 50 percent larger in diameter than current 200mm wafers, will allow chipmakers to produce more chips per wafer, thus increasing manufacturing capacity of existing factories and reducing per-chip manufacturing costs.

Because fabs cost in the range of $2 billion and take years to build, companies gamble that demand will remain as strong when the first chips eventually leave the manufacturing lines as it is when the chipmakers break ground.