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Report says chip industry may be slowing down

An industry trade group says semiconductor equipment makers posted a book-to-bill of ratio of 1.16, meaning orders were 16 percent higher than shipments for September.

Although the semiconductor industry continues to grow, there are signs it is getting a little tired.

Semiconductor Equipment and Materials International (SEMI), an industry trade group, said semiconductor equipment makers posted a book-to-bill of ratio of 1.16, meaning orders were 16 percent higher than shipments for September.

While that means demand continues to outpace supply, the figure is down from last month's ratio of 1.23. During September, customers booked $2.8 billion in semiconductor equipment orders, the first sequential decline since September of last year.

The news follows on the heels of a downturn at National Semiconductor. The company's shares fell 34 percent Tuesday after the cell phone chipmaker said sales and profit may decline in its fiscal second and third quarters because of excess chip inventory at mobile phone makers.

The decline in growth "likely reflects a seasonal slowing in new orders growth rather than a significant change in the current cycle," Elizabeth Schumann, director of industry research and statistics for SEMI, said in a statement.

Yet Eric Chen, a semiconductor equipment analyst at Chase H&Q, believes the numbers indicate the cycle may be in deeper trouble. Chen noted the book-to-bill ratio for test and assembly equipment makers has slipped for the past six months, coming in at 0.91:1 in September, compared with August's figure of 1.00:1. Declines in test equipment typically precede a slowdown in semiconductor sales.

"The industry has never before experienced a mid-cycle?correction that lasted this long," he wrote in a note released Tuesday, and he advised a "wait-and-see" strategy toward the sector.

Other analysts believe the downturn is a reaction to market expectations that were already too high.

"Expectations for (equipment) spending were based on unrealistically high end-market sales forecasts; it was only a matter of time before chipmakers realigned budgets to levels more consistent with revised end market projections," said SG Cowen analyst Tia-min Pang.

In addition to National Semiconductor, Ericsson cut forecasts for profitability and sales this year because of losses from making mobile phones.

Ericsson's phone business lost money in the company's fiscal fourth quarter, and the company blamed reorganization, a lack of components, falling prices and a weaker replacement market.

Slower than expected mobile phone sales prompted Motorola to revise its earnings expectations. The company said on Oct. 11 that it expects fourth-quarter earnings of 27 cents a share, down from previous analyst expectations of 37 cents, according to First Call/Thomson Financial.

Dan Niles, a chip analyst a Lehman Brothers, is not worried. He says chipmakers can easily close down plants to avoid excess capacity. He also believes semiconductor companies will watch demand on a daily basis and "take a little more time to be circumspect about