Excess Chip Supplies Dim Industry Outlook
Customers’ overstocked supplies of semiconductors--the scourge of the chip industry during its severe recession several years ago--have returned to plague chip makers but not enough to signal another disastrous slump, analysts say.
“Clearly it is a downturn, but it is not an out-and-out recession,” said Andrew Kessler, an analyst for Paine Webber Inc. “It is more of an adjustment.”
Concern was heightened last week when Intel Corp., a leader in the industry, said it had under-estimated customers’ excess supplies of chips and, as a result, will suffer a 10% drop in revenue in the fourth quarter. Intel also said its earnings will be lower.
“You thought it couldn’t happen to Intel, but it did,” said John Girton, an analyst for Van Kasper & Co. “I was shocked.”
Analysts said investors are wrongly worrying whether an industry slump is approaching. But the Intel problems, coupled with other chip companies’ predictions of order softness because of dwindling demand in the personal computer market, point to problems.
Book-to-Bill Down
In 1985 and 1986, the last major slump period in the industry, suppliers suffered from customers having grossly overstocked inventories after the 1983-84 period marked by short supplies of chips from manufacturers.
But the amount of oversupply is less than half the buildup that led to that slump, said Daniel Klesken, a Montgomery Securities analyst.
“This will be nothing like the 1985-86 problem,” he said.
Nonetheless, Klesken said the book-to-bill ratio (the relationship between semiconductor orders to shipments in any given month) will not reach above 1.0 until as late as March, 1989. A measure of 1.0 or better indicates a healthy industry in which new orders are replacing shipments.
The measure fell below 1.0 to 0.97 in September for the first time since the last slump two years ago. It went even lower to 0.92 in October.
Analysts had been predicting that order levels will increase in November and December to boost the widely watched ratio. But now there are doubts.
The U.S. semiconductor industry likely will be flat in 1989, compared to 30% growth this year. Analysts expect about 5% growth worldwide.
Tempering the gloom are forecasts of a relatively steady outlook from the biggest consumers of microchips, the major computer companies. The personal computer industry sees revenue growing by 15% to 18% in 1989.
But some corporate executives in the chip industry see the computer producers as overly optimistic.
Charles Sporck, president and chief executive of Santa Clara, Calif.-based National Semiconductor Corp., said late last month that semiconductor sales will slow through next year because demand in the personal computer market is softening.
Because a slowdown is perceived in the industry, distributors are cutting back orders, Kessler said. “Prices tick down and distributors just back off,” he said.
