Longer Road Ahead for Chip Makers
A fresh batch of cutbacks and grim forecasts by chip makers has sent semiconductor stocks tumbling and dashed hopes that the industry will pull out of its long slump any time soon.
In the last two days alone, some semiconductor stocks have lost 10% of their value, giving back gains made in recent weeks when it looked as if the chip industry was poised to climb out of its deep hole.
Two leading chip manufacturers had recently raised prices, and spurred by bargains, holiday shoppers have been snapping up more computers and electronic gadgets than expected, helping to whittle down the excess supplies of chips and other tech products that have been a menacing drain.
But some sobering company announcements this week, along with downbeat industry reports, have made it clear that the chip industry’s pain is far from over.
Earlier this week, Motorola Inc. said it will cut 9,400 more jobs, including 4,000 in its semiconductor business. On the same day, Toshiba Corp. said it is selling its Virginia chip plant to Micron Technology Inc. and will stop making commodity memory chips.
The industry, which this year is expected to post its biggest sales decline ever, “will be locked in a rolling recessionary environment for another 18 months or so,” said analysts at Morgan Stanley & Co. in a recent report. They cited the industry’s low manufacturing capacity use, at 59%, a lack of major new products and a weak global economy.
Trade and research groups this month pegged the industry sales drop this year at 31% to 33% from 2000, to roughly $141 billion. Though the Semiconductor Industry Assn. is forecasting a rebound in the second half of next year, there are more than a few doubters on Wall Street.
Indeed, some analysts have begun to question month-old predictions that the chip and networking industries have inventory problems under control and should start seeing sales rise by mid-2002. “I have no idea when some of these markets will turn around,” said Edward F. Snyder, a J.P. Morgan analyst in San Francisco.
Investors have lowered their expectations, too. After hitting a three-month high Dec. 5, the SOX chip stock index has dropped 13% and the S&P; electronics index has fallen 12%.
That’s not to say there isn’t a light at the end of the tunnel for the tech industry, and the semiconductor sector in particular. But it’s going to be a long ride to daylight--perhaps 18 months to two years, analysts say--and the risk of getting derailed remains high in the coming months, if corporate spending doesn’t pick up.
Sluggish sales, low consumer confidence and concerns about more terrorist attacks are giving corporate executives little comfort. Even if holiday retail sales turn out a little less dismal than anticipated, they say, the slowdown in the first three months next year could be more pronounced than normal.
Additional layoffs, a continued drought in capital spending and more cost-cutting measures are what many executives see for the next three to six months, which is about as far ahead as they look.
“We think we are pretty close to bottom in terms of sales, but we really don’t know,” said Kris Chellam, chief financial officer at Xilinx Inc., a San Jose maker of programmable memory chips.
Although chip companies have been writing down the excess inventory, that has only masked the lingering problem, said Greg Sheppard, a market analyst at research firm ISuppli Corp. in El Segundo.
The semiconductor industry’s inventories still exceed usual levels by at least 10%, and companies will be working well into the new year to lower the amount, Sheppard said.
Cisco Systems Inc., a major networking equipment maker whose high inventory levels early this year reverberated throughout the chip industry, calmed investors recently by saying it has made progress in cutting costs, reducing inventory and boosting revenue.
“But it was just that; it was just progress,” said Cisco’s chief financial officer, Larry R. Carter. “We’ve got a long way to go,” he told analysts at a recent conference. Cisco stock rose steadily to a three-month high two weeks ago of $21.79 a share. It closed Thursday at $18.29, down $1.06 on Nasdaq.
The still-high stockpiles at Cisco and other tech equipment firms such as Lucent Technologies Inc. and Nortel Networks Corp. continue to push down sales at suppliers and chip plants.
“That’s the biggest single damper on our revenue,” said Balakrishnan S. Iyer, chief financial officer for communications chip maker Conexant Systems Inc. in Newport Beach. “We are shipping less product to our customers than they need to support their manufacturing, and what they are selling is less than what they had expected to sell.”
A pickup in demand for computers and cell phones should help drive future sales of semiconductors, which are becoming more crucial to information technology as chip makers pack more and more power onto tiny wafers and circuit boards. Chips now account for 40% of the value of today’s personal computers and 42% of the cost of cell phones.
“The long-term trend is for chips that can do more, which is why the industry can grow faster than the overall equipment industry,” said Doug Andrey, analyst at the semiconductor industry trade group.
There have been some positive signs.
Two weeks ago, rivals Intel Corp. in Santa Clara, Calif., and Advanced Micro Devices Inc. in Sunnyvale, Calif., said sales of their microprocessor chips will be higher this quarter than they had expected.
Meanwhile, Samsung Electronics Co., the world’s biggest memory-chip maker, said it will increase prices an average of 10% for large customers. And Hynix Semiconductor Inc., the third-largest memory-chip maker, said prices for contract customers will go up as much as 20% this month.
Analysts believe demand may be increasing because Microsoft Corp.’s new Windows XP operating system requires about twice the memory-chip capacity as previous versions.
But these healthy signs belie difficult times.
With weak global markets, the recession in the United States and few signs that businesses are in a hurry to expand, the outlook is at best cloudy. The country needs to see the job market rising and corporate profits increasing before there is a revival in capital spending, which would spur the tech industry, said Wesley Basel, an analyst at research firm Economy.com Inc. in West Chester, Pa.
“There’s a strong possibility of another slight downturn” in 2002, Basel said, noting that any retail sales gain this quarter is simply a seasonal surge. “All the price discounts are going to eliminate all the pent-up consumer demand. And the business market really hasn’t recovered yet.”
In a preliminary report Wednesday, Gartner Inc.’s Dataquest market-research unit pegged the global 2001 chip sales drop at 33%, with Intel, the biggest chip maker, and STMicroelectronics, Europe’s largest, falling 22% and 19%, respectively.
Analysts at Morgan Stanley figure that the semiconductor industry is bottoming out, but they aren’t so confident that things will turn around by mid-year. What the industry is looking for are new, long-term supply contracts.
“Customers are ordering only what they need, and we’ve got plenty of inventory to ship right away,” said Xilinx’s Chellam.
Xilinx tries to keep a supply of chips for no longer than 150 to 180 days, but earlier this year, the company and its distributors had as much as 280 days’ worth of chips to sell. After writing down the value of its excessive inventory by $160 million in the last quarter, it now expects to hit the 180-day mark by the end of March, Chellam said.
What it hasn’t had a chance to do, he said, is put an improved manufacturing process through the paces to see how it handles higher loads. The new process developed during the downturn is designed to turn out a higher volume of silicon wafers at cheaper prices. But so far, demand simply hasn’t been there.
