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Gartner gives grim chip outlook

Posted: 16 Jan 2008 ?? ?Print Version ?Bookmark and Share

Keywords:semiconductor market? chip industry? memory sector?

The semiconductor industry has hit the single-digit era. Even worse than finding a few more grays hairs of maturity as business slows, chipmakers face some old structural problems that may be catching up with them.

The semiconductor market will grow less than 5 percent over the 2006 to 2011 period, according to a forecast by Gartner Inc. What's more troubling is the news that the traditional difficulties of the memory-chip sector are likely to flare up into a major crisis during the period.

"The market is maturing and it is time for further consolidation," said Bryan Lewis, VP of research for semiconductors at Gartner, speaking broadly of the chip industry. "If you don't have scale or a clear way to add value, you need to consider exiting this business."

Gartner pulled down its forecast for the semiconductor industry for 2007 and 2008. Semiconductors could slip into recession this year, depending on issues in the broader economy, Lewis said.

The tightening situation is tied to continuing price pressure in consumer markets such as cellphones and LCD TVs and to an oversupply in DRAMs. Lewis warned that a contraction in chip sales of as much as 5 percent could kick in this year if oil prices do not moderate and if holiday sales are disappointing.

Economists working with Gartner are not forecasting a U.S. recession in 2008. However, the probability of such a macroeconomic recession has risen from just 10 percent in June to 35 percent in a November forecast.

Memory loss
However, it's the memory sector that is raising the biggest warning flags. Analyst Bob Johnson referred to what he called a "ticking time bomb" of increasing equipment depreciation costs for memory makers.

In an analysis of industry profitability, Johnson found the memory sector tied with analog as the least profitable, at about 7 percent. However, analog chips use relatively mature process technologies, while memory makers race to adopt the latest technology in the biggest fabs.

For example, Hynix added significant memory capacity recently, gaining 20 percent market share in the process to become the third fastest-growing chip company in 2007. But the added supply is fueling a memory price war that has helped drive down industry growth projections.

Given its dynamics, the memory sector is not producing the money it needs to fuel R&D, buy new equipment and cover capital depreciation. Memory companies forged partnerships that helped make up a funding shortfall of $10 billion over the last four years, but they will need an estimated $65 billion to meet their equipment and R&D needs in the next four years, Johnson added.

"At this rate, the memory industry is going to be unprofitable by 2010, and that's the best case. It could very well happen earlier, given current pricing pressures," Johnson said.

Capital intensive memory sector is most troubled part. (Click to view full image)

The financial pinch does not even factor in a possible move to 450mm wafers, which companies such as Intel and Samsung are pushing to start using in 2012. "That time frame would require equipment companies to spend most of their profits for the next four years on the 450mm transition, and that is not going to happen," Johnson said. The good news is that Samsung, the largest memory maker, is well positioned to invest in the needs of its memory division, he added. Beyond that, memory makers will need to find new financiers or business modelsor consolidate.

32nm challenge
Times will only get tougher for all chipmakers as the industry moves to 32nm process technology. Design work will start in 2009 and 32nm devices will move into production in 2010. The cost of developing a 32nm device from scratch could hit $75 million.

"This will drive consolidation and collaboration," said Lewis, recommending that chipmakers and OEMs move to configurable platforms like Texas Instruments' OMAP or NXP's Nexperia. "As we move to 32nm, these sorts of silicon platforms will become a must," he added.

For chipmakers, process development costs for 32nm manufacturing could hit $3 billion, twice the level for 65nm process technologies. Costs of a 32nm fab are estimated to reach $3.5 billion, Lewis said.

- Rick Merritt
EE Times




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