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Outlook: Semi's situation is not yet like 2001

Posted: 28 Oct 2008 ?? ?Print Version ?Bookmark and Share

Keywords:forecast? vendors?

Some harrowing phrases in relation to the high-tech industry's worst market challenges are popping up in executive comments, reminiscing nightmares from the past about what the industry might expect next year and beyond.

For the first time, industry officials are tossing around dreaded words and phrases like "difficult," "murky," "low or limited visibility," "growing uncertainty" and "challenging climate." All these amid dizzying equity price swings starkly mirror their concerns about the direction of the global economy.

"Visibility is low and forecasting is challenging," said Peter Oppenheimer, chief financial officer, Apple Inc. "Business levels are difficult to predict," noted Paul Otellini, president, Intel Corp. and CEO. Another way of saying is the outlook is "murky," a word used by Dirk Meyer, president and CEO, Advanced Micro Devices Inc. NXP Semiconductor executives were equally blunt, noting in a statement that "visibility of sales development going forward is limited."

These concerns are justified, especially that the industry had slipped badly in the past because of its inability to accurately match forecasts and actual demand. However, the technology market has ridden an even wilder horse in the past, and the current market squeeze, although negative and worrying for IT equipment vendors, component suppliers and contractors, doesn't in any way match what occurred to the industry in 2001.

Better scenario than '01
Several factors put the tech industry in a better position this time around. First, the high-tech market isn't climbing down from a torrid growth environment, unlike the 2001 tsunami that hit the sector.

This is important for two major reasons. It means any sales declines probably won't be as steep. Second, the inevitable disruptions to business planning and reorganizations and cost-cutting measures would not be as severe.

There are other positive indicators. In the technology equipment supply chain, contract makers have shed most of their high-cost facilities and diversified operations, which means the cash-burn rate during a downturn will be limited, and risks could be spread over more business segments, along with recession-resistant markets like medical, industrial and instrumentation.

Further, the IT market has become more global with new cost centers and consumer markets emerging in developing and faster-growing regions to increase flagging demand.

Inventories are also generally leaner across the industry, a sharp contrast from past downturns when surplus capacity pulled down market segments as demand trailed supply.

One of the main reasons for the lower inventory structure is that industry leaders aggressively outsourced production, forced tight inventory management strategies on suppliers or reorganized operations to become fabless IC vendors, relying instead on foundries for wafer supply.

Supply chain setbacks
There are still many challenges in the supply chain. Many OEMs, for instance, are holding on manufacturing sites like JP Morgan estimating 65 percent of today's electronics are still manufactured internally and this could be problematic in a recession.

Motorola Inc., for instance, still makes most of its wireless handsets, and the division, which the Schaumburg, Illinois' company has opted to spin off, could come under more profitability pressures if a recession results in lower capacity use.

Nobody knows exactly what lies ahead for the tech industry this time, but companies certainly cannot afford a repeat of 2001.

It was the year the bottom slid of the networking and telecom equipment markets, and the dot-com boom turned into a burst heard around the world. Global data networking equipment sales nosedived only a year after rising to a record high, dragging down the IC market by the steepest percentage decline in industry history.

Deeply wounded markets
The worst hit IT equipment sector during the 2001 recession was wired communications, according to historical data from market researcher iSuppli Corp.

In 2001, for instance, the wireline communications equipment market declined 18 percent to $69.6 billion, from $85.3 billion in the past year. IC sales to the segment decreased 37 percent in a combination of sagging demand and severe pricing declines.

Seven years later, wired communications equipment sales have yet to recover to the 2000 level, and estimates show the market won't bounce back fully until the next decade. iSuppli expects 2009 wired communications sales will be around $76.6 billion, improving from an estimated $72.5 billion in 2008, but still below the record 2000 figure of $85 billion.

Other IT equipment markets have fared much better. Wireless communications equipment sales fell 12 percent in 2001, to $79.6 billion from $90.2 billion in the preceding year, but quickly recovered. Two years later, they had pulled ahead of the record 2000 numbers. The industry hasn't looked back ever since. Wireless equipment sales doubled by 2007 to $171.3 billion with IC sales to the segment increasing to $52.6 billion during the same period from $31 billion in 2000.

iSuppli estimates wireless IC sales will continue to increase even during the next market slowdown and should rise to $64.3 billion by 2012.

The consumer electronics market performed even better in 2001. Equipment sales in the sector rose to $160.5 billion in 2001 from $157.4 billion in 2000, and quickly surged to $249 billion by 2007. The category is forecast to keep increasing at least through 2012, when iSuppli estimates it would have risen to $339.9 billion.

The entire IC market wasn't as fortunate. Chip sales plunged 43 percent in 2001, to $101.8 billion from $178.9 billion in 2000, according to the Semiconductor Industry Association. The industry experienced growth in 2002, but it wasn't until 2004 before worldwide sales finally crawled past the past record.

By then, dozens of ICs, passives, interconnects and electromechanical companies and electronic manufacturing services providers had disappeared, some merging with stronger rivals. A few others went under, unable to finance operations as customers froze purchases or exited the embattled networking equipment market.

Trying times are here again
It's seems the market will be sorely tested again. Market researchers have been reducing their IC sales forecasts and hedging even their updated projections with caveats about events outside the sector.

iSuppli, for instance, has decreased its global IC forecast for 2009 to $280.1 billion, up 3.5 percent, from $271 billion in 2007, and down from its past forecast for a 9.3 percent sales expansion.

"The credit crisis is impacting the IC market on several levels," said Dale Ford, senior VP, market intelligence, iSuppli, in providing the new forecast figures. "The first level is demand for electronic equipment, from the Wall Street firms themselves, which is expected to drop and thus decrease demand for semiconductors," he added.

"The second level, and a much more significant factor, is the impact of corporations in general," he noted. "With companies unable to get credit, the crisis could spread to the wider economy, affecting demand for electronic equipment and semiconductors. The final level, and the most significant area of impact, is the wider effect on consumer confidence and spending if the overall economy collapses," Ford stressed.

More prepared now
Nevertheless, most of the high-tech industries are in the fighting form even if such a gloomy scenario will emerge, according to analysts.

"The worsening macroeconomic environment and evolving global recession will undoubtedly impact all companies throughout the technology supply chain," said Kevin Kessel, analyst, JP Morgan Chase & Co. "However, it's very important to consider that the overall structure of the tech supply chain industry and the positioning of individual companies are vastly different from the last recession that occurred in 2001," he added.

At the same time, he noted that many technology companies are cash-rich, and are not as highly leveraged as they were prior to the 2001 recession when a rash of mergers and acquisitions resulted in extensive borrowing in the industry.

An EE Times review of the balance sheet at some of the industry's biggest IC companies and OEMs, for instance, showed that most have large amounts of cash and short-term securities and limited debts, which put them in a good position to withstand and even expand R&D spending during a protracted downturn.

The cash stash will help cushion blows from a looming recession, but a prolonged crisis could once again resurrect the horrors of 2001, a year many would simply like to forget.

- Bolaji Ojo
EE Times

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