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How Long Will the Chips be Down?

For nearly two years, the semiconductor industry has been mired in a slump, buffeted by slowing orders for everything from PCs, servers to mobile phones and handhelds. In response, chip makers laid off employees, idled plants and delayed or canceled factory moderizations.

While unpleasant, sector stalwarts, including New England's Fairchild , Teradyne and Varian aren't panicked.

Semiconductors come back, they always do. And now that we know Dean Kamen hasn't invented anything to make the devices obsolete, it's just a matter of time. Recent data, legislative action and investment activity suggest that the current chip-dip may be easing.

First, empirical evidence. A Semiconductor Industry Association study pegged worldwide spending on semiconductors at $10.6 billion in November (figures for December aren't in yet), a modest, yet heartening, 1.6 percent gain from the previous month. It was the second consecutive increase and bodes well for fourth quarter results.

"Our forecast released in November calls fourth quarter sales to be 4.7 percent higher than the third quarter and with two months of data now in, we are on target to meet that projection," said George Scalise, president of the San Jose, Calif.-based industry group.

The report also showed Europe with the healthiest market, a fact not lost on U.S. chip makers. In December, the industry cheered passage of the Trade Promotion Authority (TPA) Act in the U.S. House. The measure gives the president greater authority to negotiate trade pacts and should help U.S. technology manufacturers. The item now goes to the Senate.

In other research news, analysts at Goldman Sachs struck a cautiously optimistic tone in a recent report, noting that there were no earnings warnings from the sector in the fourth quarter. There had been warnings the previous three quarters.

"This does not signal a full-fledged turn, but is the first sign of recovery in our view," GS said.

Still, GS said the expected 2002 upturn may resemble a gradual incline, rather than a sharp spike.

Finally, there is the anecdotal. Venture capitalists, stung by their exhilerating but doomed fling with dot-coms, are taking another look at semiconductor startups. These investors, while still betting on new advances in technology, are at least are operating in markets where there is a proven demand.

In the Boston area this week, investors pumped a total of $33.7 million into chip technology firms. ChipWrights, of Newton, Mass., banked $8.7 million and AmberWave, of Salem, N.H., amassed $25 million.