Semiconductors Fall Off The Wagon

03.09.2008 // www.forbes.com 

So far the semiconductor industry has held on tight despite the global economic storm, but as consumer spending continues to slow, dragging China down with it, chip demand will follow.

On Tuesday, research firm Gartner told the Semiconductor Industry Association that it trimmed its 2008 forecast for worldwide semiconductor revenues to $285 billion, a rise of 4.2%, from an estimate of $287 billion in the April-June quarter.

Gartner also forecast that it will slash its projections further over the next few quarters, depending on weakness in the U.S. economy.

"End-market demand for electronics products held up well in first half of '08, but reports from Taiwan indicate semiconductor market conditions are deteriorating," said Gartner analyst John Barber in a presentation during Gartner's 14th annual semiconductor conference in Singapore. Barber said the second half of 2008 and the first half of 2009 will be weak, making it difficult to recover until the first half of 2010.

Nonetheless the Semiconductor Industry Association said Tuesday that semiconductor chip sales totaled $22.2 billion in July, up 7.6% from $20.6 billion in July of last year and up 2.8% from $21.6 billion in June. Worldwide semiconductor sales for the year through the end of July were $148.3 billion, up 5.0% from the same period of 2007.

SIA president George Scalise said the year-over-year sales increase for semiconductors was due to strong demand for consumer electronics, personal computers and cellphones, which account for about 80.0% of chip demand. The demand has been especially strong in China and India. But the SIA said sales of memory chips--used in personal computers and in cellphones, digital cameras and other portable devices--continued to fall in July due to lower prices.

Total chip demand from China, including Hong Kong, will rise to 62.0% in 2012, up from about 59.0% last year, but growth will slow to single-digit levels, said Gartner analyst Philip Koh.

Koh said Vietnam and Thailand are expected to be the next two growth markets in the region, as more companies diversify their manufacturing operations into other emerging markets apart from China and India.

Last year, the global chip market grew 3.8% to hit revenues of $274 billion.

July chip sales in the Asia Pacific rose 14.7% year-over-year to $11.3 billion, accounting for roughly half of total sales, SIA said. Worldwide sales rose 7.6% to $22.2 billion, but sales in the Americas dropped 3.8% to $3.4 billion. Sales in Europe rose 3.3% to $3.4 billion, while those in Japan also went up 3.6% to $4.1 billion.

Citigroup chip analyst Glen Yeung said that the 7.6% year-over-year sales growth in July signals slowing growth for the industry after five consecutive months of increasing year-over-year revenue growth. June chip sales were up 8% year-over-year. Yeung also warned that chip inventory levels may be getting too high.

As consumers' wallets keep getting squeezed, they will continue to shift to lower-priced products. The slowing of the world economy could push semiconductor prices down, which is bad news for the industry.

Chipmaker Broadcom (nasdaq: BRCM - news - people ) announced last month it would buy Advanced Micro Devices (nyse: AMD - news - people )' digital television chip business for $192.8 million in cash in order to expand its digital television offerings. (See " Broadcom's Digital Dreams.") On Feb. 17, the Federal Communications Commission has said that all broadcast television stations in the U.S. will stop broadcasting on analog airwaves and begin doing so only in digital. Broadcom wants to take advantage of this rapidly growing market, said Stifel Nicolaus analyst Cody G. Acree.

On July 15, Intel (nasdaq: INTC - news - people ) reported that demand for its microprocessors was unseasonably high, boosting its second-quarter earnings by 25.0%. (See " Intel Boots Up On Microprocessor Demand.")

The Semiconductors HOLDRs (amex: SMH - news - people ) exchange-traded fund fell 1.2%, or 35 cents, to $28.15 in afternoon trading on Tuesday, while Advanced Micro Devices lost 0.8%, or 5 cents, to $6.34. Micron Tech (nyse: MU - news - people ) sank 0.5%, or 2 cents, to $4.22. Intel rose 1.3%, or 29 cents, to $22.58.