Semiconductor revenue will drop 17 percent this year compared to last year, according to market research released Tuesday that added an exclamation point to the flurry of revenue warnings from chip makers.
"The problem is fairly simple. Chip vendors aren't getting the orders," said Tom Starnes, chief analyst for Dataquest Inc.'s worldwide semiconductor group. "There's a lot of inventory to burn off in a lot of channels, whether its the communications guys or the networking vendors. The PC vendors have their inventory under control, but the demand isn't there."
A year ago, the semiconductor business soared with the rise of the digitized world, he said. "Last year the party had started, and vendors were working hard at providing the products that were on the books," Starnes said. "Things looked real good right up to the end of the year. Then the cell phone guys looked around and said, 'Hmm, handset sales aren't as good as we thought.' And then the computer makers weren't selling as much. There were some red flags."
The 17 percent drop in worldwide semiconductor revenue this year will precede a slow market recovery over the next couple of years as the industry grapples with inventory and demand issues, along with the slowdown in the U.S. economy, according to the report.
No segment of the semiconductor market remained safe from the cyclical downturn.
"One of the places it hits chips is in the venture capital area," Starnes said. "They've done a complete turnaround. No more drive-by-fundings."
Flash memory serves as a case in point, Starnes said.
"It had been growing ... but in a year like this year it's a microcosm. Demand for cell phones went down, just as a lot of capacity came on for flash memory." Dataquest expects flash revenue growth to be close to zero this year.
"It's flattened out significantly," he said.
DRAM (dynamic random access memory) revenue is forecast to fall 26 percent this year, recovering next year, Dataquest said in the report.
Dataquest, a unit of the Gartner Group Inc. technology market research company, predicts a fairly slow recovery, with 2002 semiconductor revenue of $213 billion and 2003 revenue of $265 billion.
While last year's growth astounded Wall Street, Starnes doesn't consider it unusual.
"I think that we'll see another one in two years," he said of that kind of growth cycle. "Digital electronics have changed our world. People want more information, people want it in a form they can use, in a format that's convenient, they want it portable, they want it when they want it. People aren't stupid, they don't buy something and chuck it a year after they buy it. Last year wasn't unusual, it's a continuation of a revolution."
2000 was a triumph -- 32.5 percent revenue growth -- but Starnes said the size of the semiconductor market won't match 2000 until 2003, and the rate of growth in the market won't come close to matching last year's figure until 2004, when the boom-and-bust cycle of the semiconductor business will reach the top again, expanding 30.8 percent to $365 billion before shrinking the next year.
Starnes said he believes it's possible for the market cycles to grow shorter as information is passed more efficiently between supplier and buyer. But the psychology of business drives the cycles, he said.
"A lot of companies overbuild their capacity," he said. "It's kind of a creeping thing. Everyone plans for getting a little bit more business than they got last year."
Dataquest predicts a rebound in the memory market next year, and the fastest growth for the ASIC (application specific integrated circuit) and SOC (system-on-chip) rich logic category of chips, with overall compound annual growth rate topping 10 percent through 2005. The ASIC and SOC chips combine the functions of several kinds of semiconductor -- microprocessor, memory, logic, analog circuit and other processes.
"They're used everywhere, from MP3 players to routers and switches and telephones, and laser printers," Starnes said.
The chips are highly integrated and tend to be highly customized by device makers, leading to the potential for these kinds of semiconductors to eat market share from other specialized chips.
"If the ASIC chip already has a processor on it, I don't need to buy a separate processor as a component," he said.
The Semiconductor Industry Association (SIA) on Tuesday released figures confirming a slump in sales that has been continuous since last November. SIA President George Scalise, blamed the decline on an inventory overhang and macroeconomic factors. The SIA expects the industry to complete the inventory correction in the third quarter of this year, and to start the recovery in the fourth quarter, the association said in a statement.
Dataquest's pronouncement follows shortfalls and profit warnings by most of the high-profile semiconductor makers this year. Motorola Inc.'s struggles resulted in a 4,000-job cut from its semiconductor division in February; Intel Corp. cut 5,000 jobs in March and warned investors that its profits would be dramatically lower for the quarter; NEC Corp. laid off 700 in a U.S. fabrication plant in April; later that month Texas Instruments Inc. (TI) cut 2,500 jobs.
All cited excess inventory and a slowing economy in statements accompanying their layoffs. The strong sales of 2000 prompted each to make more semiconductors than people were willing to buy this year. The change caught the industry off guard. The market downturn is one of the sharpest ever for the semiconductor industry, according to TI's Chairman, President and Chief Executive Officer Tom Engibous.