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Commentary: Long-range semiconductors forecast sunny

The bad news from Intel and somber predictions for semiconductor manufacturing equipment vendors in 2001 simply represent adjustments to overblown expectations.

3 min read
By James Hines and James Handy, Gartner Analysts

The bad news from Intel and forecasts for tragedy among semiconductor manufacturing equipment vendors in 2001 simply represent adjustments to overblown expectations. Gartner sees a positive long-term trend.

Consider what's going on from

See news story:
Chip equipment makers feel Intel aftershocks
both the demand and the supply sides. Gartner forecasts that worldwide semiconductor sales in 2000 will reach $231 billion. Through 2004, the market will have a compound annual growth rate of 15 percent. Growth will equal 37 percent in 2001.

The outlook is not bleak, but an aberration in the sales cycles of PCs and cell phones has made the latest bad news seem worse than it should. Normally, sales of PCs drop substantially in the first quarter of the year and recover steadily to peak in the fourth quarter. In 2000, PC sales were strong in the first and second quarters, prompting industry observers (including Gartner) to revise projections upward to forecast a blowout year. However, PC sales slumped unexpectedly in the second half of the year, so 2000 will turn out closer to the original, less exuberant forecast.

At the start of 2000, Gartner forecast worldwide cell phone sales of 435 million units. And we were right to hold to this number throughout the year. But others kept upping their projections to as much as 500 million units. Again, lower-than-expected growth in sales will mean that 2000 will meet original estimates.

However, OEMs in the semiconductor business feared that shortages, which did materialize in some segments, such as flash memory and foundry, would leave them out of the party. Therefore, they built up buffer inventory. They have to sell this down now, depressing profit margins temporarily.

On the supply side, manufacturers have fallen victim to their own business cycle. The industry had three lean years, which ended early in 1999. During this time, capital spending on new equipment was not high enough to keep up with long-term capacity demands. Manufacturers went on an investment binge, which caused sales of semiconductor manufacturing equipment to rise a stunning 80 percent from 1999 to 2000.

It takes time, money and energy to install that equipment in fabs, get manufacturing processes going, qualify the production lines, and ramp up output. Naturally, 2001 will not have the same rate of growth as 2000. Gartner forecasts growth in 2001, just at lower levels.

This bust-and-boom cycle has occurred several times before in the semiconductor manufacturing equipment market. It may be tempting to see the latest bad news as a continuation of this pattern, but it is too early to call a market downturn. The current boom is not over yet.

(For related commentary on the battle between Intel and AMD, see TechRepublic.com--free registration required.) Entire contents, Copyright ? 2000 Gartner Group, Inc. All rights reserved. The information contained herein represents Gartner's initial commentary and analysis and has been obtained from sources believed to be reliable. Positions taken are subject to change as more information becomes available and further analysis is undertaken. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of the information. Gartner shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof.