2009 could rank among the worst years ever for chipmakers.
A few weeks ago, Stamford, Conn.-based market tracker Gartner Inc. made some bleak pronouncements for an industry accustomed to growth.
“Never before has the semiconductor industry experienced two negative growth years back to back,” said Bryan Lewis, chief analyst for Gartner’s semiconductor forecast based in San Jose. “And never before has it experienced such a sharp one quarter drop-off in orders and demand.”
For the fourth quarter, Gartner predicts a 24% drop in chip sales from the third quarter. That’s worse than the 20% drop the industry saw in early 2001 amid the technology meltdown.
For all of 2008, Gartner projects a 4% decline in global sales to $262 billion, followed by a 16% drop to $219 billion for 2009.
“We are clearly in uncharted waters,” Lewis said.
Gartner revised its outlook after a slew of chipmakers cut their estimates for the fourth and first quarters.
“There has been an amazing number of very negative comments and guidance from companies in the last four weeks,” Lewis said. “Sales went off a cliff in Q4.”
Several local chip companies are among those that warned.
Early last month, Irvine’s Broadcom Corp. lowered its fourth-quarter sales outlook to $1.05 billion to $1.1 billion, down from $1.17 billion to $1.2 billion. The maker of chips for consumer electronics, computers and networking gear cited slowing demand.
In mid December, Newport Beach-based Mindspeed Technologies Inc. reduced its sales projection for the recently ended quarter to $30.5 million to $31.5 million, down from $34 million to $37 million. Mindspeed makes chips for wide area data networks.
Mindspeed also cited “weaker than expected” demand.
In October, Newport Beach’s Conexant Systems Inc. cut its sales forecast for the December quarter to $83 million to $88 million, down from $103 million to $108 million.
It also projected a loss of $2.5 million to $4.5 million, down from a prior forecast of $4.5 million to $6 million in profits, due to “numerous customer requests to cancel and reschedule orders.”
“Computers and cell phones are the biggest markets for these companies, and all of these markets are being impacted,” Lewis said. “The question right now is how bad is it going to get?”
For 2009, PCs are expected to see a 5% drop in sales. Cell phones are set to slide 10%, according to Gartner’s data.
Larger economic conditions, including tighter credit and corporate budget freezes, are compounding matters for chipmakers.
“Business conditions are very challenging for chip firms as customers around the world contend with falling end demand and are lowering their component inventories to boot,” said Craig Berger, analyst at Friedman, Billings, Ramsey & Co. in New York.
The current downturn could be far worse than the last time chip sales fell, in 2001.
“It’s way broader this time,” Lewis said. “In past tech bubbles, the market saw artificially high growth years. People were double ordering because they were scared of not getting enough product.”
In 2001, the chip industry saw the worst sales decline in its history, with revenue sinking 33% from the peak in 2000, according to Gartner data.
2001 saw PC sales fall 3% and cell phone shipments decline 25%.
2009’s projected downturn comes after a tough 2008.
“We are going into it from a decline,” Lewis said. “2009 is likely to get double-digit ugly because there have been no big growth years in the past few and there hasn’t been much of an inventory buildup.”
Industry watchers are looking to the first quarter for signs of how severe the downturn will be and to the third quarter for indications of a rebound.
“Those will be the hinge quarters,” Lewis said. “During Q1, the issue will be if the downturn will continue. Q3 is the build up for Christmas, and that’s when we expect people to loosen up their technology budgets somewhat.”
The first quarter could see sales perk up a bit to compensate as customers get a better picture of how many chips they’ll need.
“With such a steep decline in the fourth quarter, it’s possible that many companies have overcorrected to be on the safe side,” Lewis said. “This leaves the door open for sales in Q1.”
Chipmakers have more carefully managed production and stockpiles this time around, according to Lewis.
“This will help the market come back more quickly than in 2001,” he said.
Analyst Berger is looking to see some improvement during the second half of the year.
“We think a bottom will form in the first half of 2009 as distributors and other customers replenish inventories sometime this summer,” he said in research note.
Gartner is eyeing a turnaround in 2010.
