iSuppli Darkens Semi Outlook

Semiconductor industry watcher iSuppli lowered its 2008 revenue forecast Thursday from 4 percent growth to 3.5 percent. The research firm expects revenue in the chip industry to top US$280.1 billion, roughly $10 billion more than the industry earned in 2007.

"Four percent had been our forecast for a while now. Revising down our forecast to 3.5 percent we were recognizing some specific issues in the semiconductor industry that caused us to bring it down," Dale Ford, an iSuppli analyst, told the E-Commerce Times.

"We're not saying the industry is going to decline this year. It will still show growth in our forecast, but it will not show the same level of growth we'd had before," he added.

Economic Crisis Casualty?

With Wall Street in a tailspin, it comes as little surprise that research firms are revising their revenue forecasts.

However, according to Ford, the forecast was finalized before the rapid decline of stock values that has occurred over the last few days.

"We were already seeing areas of concern and worry. For example, prices for memory chips -- DRAM (dynamic random access memory) and Flash -- those prices were much, much softer. Oversupply led to softness in that market. We observed consumer confidence coming down. Electronics and the semiconductor industry are heavily reliant on consumer purchases of electronics. Those types of factors we had already been observing, and we had already lowered our forecast," he explained.

The events of the last few weeks do increase concerns for the chip industry, Ford said.

"I don't think anybody can quantify with any credibility how the current financial crisis will affect the semiconductor industry. There is just too much panic and pessimism in the financial industry right now to really understand how that is going to translate into actual business changes and consumer purchasing decisions," he said.

What's Going On

The semiconductor industry has moved into a phase where it is experiencing lower growth than it had five or 10 years ago. "It has matured a bit," said Ford.

The industry has already been downsizing itself through layoffs, mergers and acquisitions. Earlier this week, for example, AMD (NYSE: AMD) announced that it had spun off its chip manufacturing half, outsourcing production so that it could shed $1.2 billion of its $5.3 billion debt and focus on chip design.

"Most of the industry has been heading toward foundry models for the past 15 years. Just in the past few years, [Texas Instruments], [STMicroelectronics], Infineon, IBM (NYSE: IBM) and many others have gone to a fabless or fab-light model," Jim McGregor, an analyst at InStat, told the E-Commerce Times.

In response to low growth, most companies have already been adjusting their expenses and workforce levels or engaging in M&A actions, Ford noted.

"It's been in a cost confinement mode for over a year now. What this means is that it will get a little tougher than it already was," he continued.

The Impact

"iSuppli's numbers are not surprising. 2008 is not going to be a great year for semiconductors. And when you look at 2009, all this weakness we see will probably persist for another four quarters," Patrick Wang, a Wedbush Morgan analyst, told the E-Commerce Times.

One easy way to think about this, he continued, is that if the economy is not doing well, then there is not a lot of discretionary spending going on.

"If there is no cash to buy it, they are not going to sell. Six months ago, we thought 2009 was going to be a good year. We thought 2008 would be weak but would rebound in 2009. More realistically we're talking about very low expectations for 2009 because there is no visibility into demand or liquidity in the market," Wang explained.

Consumers with the money to spend will find that pricing comes down, according to Wang. Device manufacturers will buy surplus chips as components of their media players, computers and other devices.

"Everybody will be incentivized to move inventory, and what will happen is you'll see margin compression and more competitive pricing. For consumers able to buy things, Black Friday this year will be amazing -- if you have money," Wang predicted.

However, within the semiconductor industry, McGregor suggested companies take a conservative approach in terms of production capacity.

"This economic downturn, unlike recent downturns, could be prolonged. I would anticipate that certain reactions to current market conditions, like Micron cutting Flash production, will help stabilize pricing, but that economic conditions will continue to weigh on demand," he said.

"The one thing the semiconductor and electronics industry have going for them is that they continue to grow as a percentage of total worldwide gross domestic product, but market conditions will determine buying patterns. At this point it is too early to completely understand how these will balance, but I believe that shooting for revenues equal to 2008 is a comfortable bet," McGregor concluded.