Barometer of Chip Sales Plunges to a 10-Year Low

In a dramatic indication that the high-flying technology industry is coming back to earth, a closely watched barometer of computer chip sales unexpectedly plummeted to a 10-year low in January, the Semiconductor Industry Assn. announced Monday.

The book-to-bill ratio, which measures the dollar amount of new chip orders compared with the sales, or billings, for the same period, fell to 0.93 in January, the lowest level since the SIA began to seasonally adjust its figures in 1987 and the first time since January 1991 that there were fewer new orders than billings.

Industry watchers were surprised by the depth of the drop, but they disagreed over how sharp or prolonged the slowdown in the chip industry would prove to be--and whether it reflected broad weakening in demand for the products, ranging from personal computers to cellular phones, that use chips.

Many large chip users overordered in the fall because of fears of chip shortages, analysts said, and thus the weakness in January orders is at least partially because of inventory adjustments. But many now expect chip industry growth this year to be substantially slower than previously forecast.

The SIA is optimistically sticking to its projections that call for the North American chip market to grow 29% this year to reach total sales of $60.9 billion.

“Every indicator we have is that use of all semiconductor parts are on an upturn,” SIA President Thomas Armstrong said. “Semiconductors are more pervasive than ever. . . .”

But other analysts said Monday’s numbers confirm a sharp slowdown in the chip industry, which grew at a torrid 40% rate last year. Market researcher ICE Corp. of Scottsdale, Ariz., anticipates 20% growth this year, and San Jose-based Dataquest is predicting 22% growth.

The figures were released after financial markets had closed Monday, and technology stocks are likely to take a beating today. In thin after-hours trading Monday, Intel Corp. shares tumbled $3.31 to $55.625, Micron Technology lost $2 to $37 and Applied Materials, a vendor of chip-making equipment, sank $3 to $37.

Still, even the more cautious analysts said they do not expect a full-blown recession of the kind that last struck the chip business in 1984. “The industry was overheated at 40% growth,” ICE analyst Brian Modis said. “Slower growth at 20% is more manageable.”

The biggest losers from the slowdown will be memory chip makers, including Micron and a number of big Korean and Japanese companies including Samsung, NEC and Toshiba. Memory chips are high-volume, commodity products whose price tends to fluctuate dramatically.

Falling memory prices is good news for consumers, who will see slightly cheaper PCs and dramatically cheaper memory-upgrade products.

The price that manufacturers pay for a 4-megabyte DRAM, or Dynamic Random Access Memory, the most commonly sold chip, has already plunged from a high of $14 last fall to about $9 today. Analysts predict prices could fall by an additional 50% by June.

Lower prices will probably result in revisions of aggressive capital spending plans by chip makers. Dataquest, which had been projecting a 35% increase in capital spending this year, now expects spending growth to be in the low 20s as manufacturers scale back expansion plans. That could mean fewer orders for semiconductor equipment manufacturers.

But there could be a silver lining for the technology sector amid the chip industry’s growing gloom. For example, small, entrepreneurial chip designers that cannot afford to build their own manufacturing plants are now finding it easier to locate producers willing to process their chips for them.

MicroUnity, a Redwood, Calif.-based maker of a new specialty chip it calls a “media processor” for use in cable modems and other communications applications, said the chip slowdown will help it get its novel product to market more quickly.

The SIA said semiconductor billings in January reached $4.47 billion, up slightly from $4.46 billion in December and up 39.5% from the year before. But bookings plunged to $4.16 billion in January, down 16.8% from December and up just 16.3% from the year before.

Semiconductor bookings declined from the $5.01-billion record level for December to $4.16 billion in January, a change of 16.8%. However, the January bookings figure was 16.3% higher than the $3.58 billion recorded for January 1995.

* INVESTOR SPOTLIGHT: A look at book-to-bill ratio. D10