Chipping Away at Recovery?

It’s no secret that semiconductor sales, like so many IT hardware sectors, have taken a beating. One only need to look at the price
war between Intel Corp. and Advanced Micro Devices Inc. (AMD), in which the chipmakers have cut
prices for certain chips as much as 29 percent, to realize how severe the situation is.

To be sure, Gartner’s Dataquest unit reported Wednesday that worldwide semiconductor revenue may total $147 billion
in 2001, a 35 percent decrease from 2000, with a nod to added strain from the events of Sept. 11. Yet in the same breath, the
research firm said it sees a silver lining in the clouds for the semiconductor industry, albeit not until some time next year.
Gartner revealed its findings in a research note in preparation for its Semiconductors 2001 conference, slated for
November 8-9 at The Westin St. Francis in San Francisco.

Richard Gordon, principal analyst for Gartner Dataquest’s worldwide semiconductor group, said firms continue to reevaluate IT
spending and that, although the current belt tightening may be the worst in semiconductor industry history, a recovery is inevitable
because chip-powered equipment purchasing is cyclical.

At this point, Gartner analysts feel electronic equipment production will return to more normal, stable levels by 2002-2003.
Specifically, the report said that 2002 should be a recovery year, with worldwide semiconductor revenue growth clocking in at 3
percent, with revenue forecast to be $152 billion. But things should pick up in the following year, Gartner said.

By 2003, Gartner expects the semiconductor industry to be enveloped in a full-blown growth cycle, with an annual growth rate of
approximately 30 percent, owing to the purchase of new, more complex computing devices.

“The slowdown in capital expenditure in 2001 will likely spill over into 2002, resulting in supply-side tightness in 2003, when a
stronger demand side is expected to have returned to the market,” Gordon said. “Improvements in the macroeconomic environment will
likely fuel a PC replacement cycle and a recovery in the wired communications sector. In addition, the rollout of 2.5 generation and
3G cellular will be well under way in the 2003 time frame, boosting demand for silicon-rich handsets.”

Gordon also cautioned hardware vendors not to overdo cutbacks.

“Despite incurring losses in 2001, semiconductor vendors must, wherever possible, maintain capital and research and development
spending levels to ensure competitiveness, and ultimately survival, as market conditions improve,” Gordon said.

The Gartner report, with all of its positive forward thinking, resounds with a bit of irony, as the U.S. Commerce Department
revealed Wednesday that the U.S.’s gross domestic product (GDP), a measure of all goods and services produced in the U.S., fell at a
.4 percent annual rate. The drop was the first since 1993, and the biggest since the first quarter of 1991 when the country was in a
recession. Economists said the drop reflects the blow to consumer spending and confidence the events of Sept. 11 have had on the

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