Chip makers face longest decline in history, Gartner says

Research firm predicts 16% drop in worldwide chip sales in '09

The semiconductor industry is facing one of the toughest periods in its history, with global chip sales expected to decline for two consecutive years for the first time ever, analysts from Gartner Inc. said today.

The research company set its forecast for worldwide chip sales at $219.2 billion for next year, a drop of 16.3% from 2008. That follows its revised forecast last week of a 4.4% drop in sales for this year compared to 2007.

If Gartner's predictions are right, it would be the first time in the semiconductor industry's history that revenue declined two years running, after decades of almost continuous expansion.

The declines are being driven by the global economic crisis, which is biting into sales of high-tech equipment such as PCs and mobile phones, as well as other products such as automobiles and industrial automation equipment, said Andrew Norwood, an analyst at Gartner in the U.K.

The decline next year wouldn't be the worst on record, he said. That happened in 2001, when global chip sales plunged 32.5% during the dot-com crash. But 2001 was preceded by two years of stellar growth, and the downturn was focused mainly on IT.

"This downturn is broad-based, not limited to only technology, has a much different growth profile before the downturn, and has far less inventory buildup," said Gartner analyst Bryan Lewis in a statement.

The lower inventory level this time around is one bright spot for the industry. Having less product backed up in the channel should help vendors recover more quickly than they did in 2001, Gartner said.

The dynamic RAM industry could also bring some relief, although Gartner called it "a wild card." DRAM suppliers are suffering so badly today that they'll be forced to cut back production or face a wave of mergers or bankruptcy, Gartner said. In either case it should help to firm up prices in the second half of next year, moderating the declines, Gartner said.

The worst thing that could happen is for governments to start bailing out DRAM manufacturers, Norwood said, which would artificially prop up the industry and prolong its difficulties.

The downturn has already caused many chip vendors to slash their forecasts as demand for CPUs, memory chips and other kinds of chips falls away.

Last week, Texas Instruments Inc., which makes many of the chips that go into mobile phones, cut its profit forecast for the current quarter by almost one-third and said revenue would be less than expected. A few days earlier, Advanced Micro Devices Inc. said revenue for its third fiscal quarter would decline by 25%, as PC sales slowed in all parts of the world, to consumers in particular.

Taiwan's contract chip manufacturers are also hurting. Last week, the biggest, Taiwan Semiconductor Manufacturing Co. (TSMC), reported its worst monthly sales in more than three years.

Gartner had said previously that worldwide chip revenue would decline by 2.2% next year. It said it was updating its forecast because "the financial crisis is having an unprecedented negative impact on fourth-quarter 2008 sales and profits."

Gartner expects the chip industry to recover in a few years, with global revenue climbing 14.6% in 2010 and 9.4% in 2011.

Copyright © 2008 IDG Communications, Inc.

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