The second half of last year was anything but merry for semiconductor stocks, and the industry looks set for some pretty rough sledging for the first quarter of this year.
Disappointing holiday sales of personal computers, too much inventory among mobile phone makers and a slowing global economy conspired to make the second half of 2000 dismal. Most chip stocks are down more than 60 per cent from their year highs.
Because of slack PC sales, many analysts believe Intel and its rival Advanced Micro Devices are saddled with excess inventory of microprocessors and fear that if they dump the chips in the market - instead of writing them off - it would be disastrous. Outside the PC industry, though, other chip companies are nearly finished working off excess inventory and should be in a better position this year. Demand, analysts say, still looks pretty good overall.
"This, of course, all precludes a recession," said SG Cowen & Co semiconductor analyst Mr Drew Peck. "If the economy falls apart, then all bets are off on any of these semiconductor companies. But short of a significant recession, the rest of the industry is actually reasonably well positioned because demand looks pretty good."
That said, it has been a rough several months for chipmakers. Among the semiconductor companies that issued profit warnings for the fourth quarter are: Altera, Cypress Semiconductor, Lattice Semiconductor, LSI Logic, National Semiconductor, and Xilinx.
"Semiconductor companies are rapidly reducing capital spending plans in response to higher inventories and weaker demand," wrote Salomon Smith Barney analyst Mr Jonathan Joseph in a recent report. "Intel is the latest example of that, with plans to push out a microprocessor [plant] expansion in Ireland and Flash [memory chip] push-outs in Colorado and New Mexico."
Others have already joined the chorus. Samsung Electronics, the world's biggest maker of dynamic random-access memory, or DRAM, chips, had said 2001 investment would be similar to the 2000 level of 7 trillion won (€5.8 billion), but company spokesman Mr James Chung said in November, "we see a possibility of reducing our planned investment for next year. We've become more conservative in dealing with a changing industry".
Another, Micron Technology, one of the biggest makers of memory chips for PCs, said it believed memory-chip makers will spend at a slower rate in 2001. Thomas Weisel Partners analyst Mr Eric Ross, in a report, revised capital spending estimates downward from a 40 per cent increase to "20 per cent and subsequently to flat based on various negative indicators within the industry".
Meanwhile, for the most part, European semiconductor stocks have shrugged off PC-related market woes, because they don't produce many chips for personal computers. Moreover, they are not heavily exposed to generic network applications, sales of which have been hurt by tapering capital spending and inventory corrections.
Also, France's ST Microelectronics and Netherlands-based Philips Electronics are primarily chipmakers for consumer products, telecommunications devices such as phones and networks, automotive, industrial and smart cards.
Steady consumer spending in areas such as interactive television keeps them going, while selected mobile phone makers such as Nokia, Siemens and Alcatel also show business is strong, with no signs of the weakness reported by Ericsson and Motorola.
Of course, this doesn't mean European chipmakers are immune.
Inventory corrections from more semiconductor customers in the United States could well affect European companies in the coming year, analysts said. Another risk is slowing economic growth and a subsequent fall in consumer spending, which is already happening in the United States.
The rather grim outlook comes as the chip industry recovered from its worst-ever slump in 1999. For 2000, sales are forecast to rise a robust 37 per cent to a record $205 billion (€217.2 billion), according to the Semiconductor Industry Association, led by chips for data networking, broadband, wireless and optical fibre communication systems.
Growth for next year was initially pegged at 20 per cent, with worldwide sales of semiconductors rising to $249 billion, but now analysts say that may be too optimistic.
"Due to slower economic growth and an inventory correction, the semiconductor industry has experienced a significant deterioration in overall fundamentals," said Morgan Stanley Dean Witter semiconductor analyst Mr Mark Edelstone.
"Following peak year-over-year revenue growth of 52 per cent in August, rates of change decelerated to 45 per cent in September and 39 per cent in October," Edelstone wrote in a note.
"Although the data will not be available until early February, we believe the growth rate will decelerate to the mid-20 per cent level in December, with 10 per cent growth likely by the middle of next year.
