Gartner: '04 chip revenue growth strong, '05 weaker

The semiconductor industry remains on track to record a significant increase in revenue during 2004, according to Gartner's latest forecast for the year released Tuesday. After that, however, the outlook takes a turn for the worse.

Chip vendors should take in US$226 billion in revenue this year, an increase of 27 percent compared to 2003, said Richard Brown, research vice president for Gartner. But revenue growth will slow considerably next year to between five and 10 percent, and could possibly contract in 2006, he said.

The semiconductor industry is well known as a very volatile business, Brown said. Gartner feels that 2004 has been a very strong year for chipmakers, but the industry can't sustain a 27-percent growth rate as the PC replacement cycle wanes in 2005, he said.

"We believe we're entering a fairly traditional semiconductor cycle. Each cycle is different, but they are created by imbalances between supply and demand," Brown said.

Chipmakers have invested billions of dollars in new manufacturing plants and technologies, which will increase the supply of chips just as demand starts to slacken toward the end of next year, Brown said. This will cause prices to soften amid a glut of inventory, he said.

Rising inventories among chipmakers have concerned financial analysts over recent weeks. These rising inventories are normal in a situation where demand is still strong, but will cause problems if demand does not keep up with the increase in supply, he said.

Demand should remain strong in 2004, Brown said. PC vendors Dell and Hewlett-Packard were happy with the performance of their PC divisions in the second quarter as corporations continue to slowly replace their aging PCs. The second half of the year is usually the strongest for PC and chip companies, and industry bellwether Intel expects to post a significant increase in third-quarter revenue compared to the previous year.

Gartner's semiconductor revenue projections include just about any piece of electronic equipment, from PCs and servers to cell phones and industrial devices, Brown said. The research company updates its revenue forecast every quarter.

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