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Chip industry poised for comeback

The factors that drove the semiconductor market down this year will largely be gone in 1999, an industry group asserts.

After slugging through one of the worst years in a decade, the semiconductor industry is poised to start making a comeback in 1999 that could culminate in annual industrywide sales of $182 billion by 2001, according to the Semiconductor Industry Organization.

A recovery is predicated on the assessment that the factors that drove the industry down in 1998 will largely be gone, said a study released by the SIA.

PC inventories are under control while the glut in memory chips has largely vanished. Demand for memory, microprocessors, and other chips, meanwhile, is expected to remain robust because demand for PCs and new products such as handhelds and other intelligence devices continues to climb. Increased demand in turn will soak up the excess factory capacity which drove down prices in the past two years.

"The semiconductor market is a $122 billion industry this year, but we should hit $182 billion by the year 2001.That's a growth rate of 42 percent," said Steve Appleton, CEO of memory maker Micron Technology and president of the SIA, in a prepared statement. "1998 has been a tough year. We experienced a negative 10.9 percent growth rate, [but] the underlying fundamentals of the semiconductor business are strong."

1998 was the first year since 1985 where the industry as a whole declined. Next year, the industry will see a 9.1 percent surge in growth, the SIA predicted.

"1999 should be better than 1998," added Linley Gwennap, publisher of The Microprocessor Report. "We're seeing a pretty strong PC processor market next year." Non-PC devices will then begin to add to chipmakers' revenues in 2000 and beyond, he added.

A side effect of the recovery, Gwennap added, could be price stabilization. Prices will continue to decline, but probably not as steeply as in 1998.

"We've seen very steep declines in the past few years that will not be duplicated," he said.

Appelton will formally deliver the results at a dinner for the organization in San Jose, California, tonight. Among the SIA's predictions:

  • The memory market will decline 25.7 percent from 1997 levels to $21.8 billion this year. In 1999, however, memory sales will grow 18.1 percent to $25.8 billion and will hit $40.5 billion in 2001.

  • Microprocessor sales will come to $23.6 billion in 1998, roughly flat with 1997 figures. Sales will climb 8.4 percent in 1999, 15.9 percent in 2000, and 17.6 percent in 2001. 2001 sales are expected to approach $35 billion.

  • Digital signal processor sales were one of the few bright spots in 1998. DSPs will grow by 6.5 percent to $3.4 billion in 1998 and then surge by 20.4 percent in 1999 and 26.7 percent in 2000.

  • North America will remain the top chip consumer, accounting for $61.4 billion in 2001. Europe will eat $43 billion in chips while Asia will consume $3.9 billion. All three regions will grow faster than Japan.

    Evidence of a chip recovery has been coming in the past few weeks. The SIA and IC Insights reported earlier this month that sales jumped over 4 percent between August and September. While September 1998 sales were still well below sales for the same month from the year before, both organizations noted that the August-September jump was double the ordinary leap in sales.

    And yesterday, Intel said that revenues for the fourth quarter would be around eight to 10 percent higher than the $6.7 billion in revenue reported in the third quarter. Intel earlier told Wall Street to expect only modest growth. As a result, the chipmaker's stock's hit a record high of $103.69 today.

    Nonetheless, Bill McClean, president of IC Insights, warned that a sustained recovery will depend upon the health of the world economy. Inventories might go down and factory capacity may begin to tighten up, but demand will have to remain robust. If it slips, so will the semiconductor industry, in all likelihood.

    "The health of the global economy is still very much in doubt. The possibility of a global recession [is] the key factor affecting the semiconductor industry in 1999," he said.

    Intel is an investor in CNET: The Computer Network, publisher of News.com.