Chip Outlook Promising Despite DRAM Prices, Asia Woes

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January 19, 1998 (6:18 AM EST)

Chip Outlook Promising Despite DRAM Prices, Asia Woes

By J. Robert Lineback ,

Despite all the worry over the "Asian Flu" and collapsing DRAM prices, 1998 still promises to be a solid growth year for the global semiconductor industry. After what is expected to be a shaky start, worldwide chip revenues should end up growing between 12% and 17% over 1997, according to most industry forecasts.

But the billion dollar question is: Just how shaky a start will it be, and how long will it last?

"It's going to get a little ugly when the next round of numbers come out from the Semiconductor Industry Association, because average selling prices are being driven down again," warned Jim Haughey, veteran industry economist based in Sudbury, Mass. "But that will start to end by spring, and in the second half, prices should push up again. That is, if the Koreans postpone some of their planned expansions," he added.

For the past two years, the semiconductor industry has been grappling with sharply falling chip prices because of a persistent glut of manufacturing capacity - especially in DRAMs and other memory segments. On top of that, the fallout from economic turmoil and currency devaluations in Asia will likely place additional pressure on chip prices, driving down total chip revenues (measured in U.S. dollars) during the next several months.

While that may be bad news for many chip suppliers, it also could be the bitter medicine that's needed to cure the industry of too much capacity, according to analysts and semiconductor managers. With prices still falling in DRAMs and other commodity parts, the pressure is expected to build on South Korea's big three chip makers -- Samsung, LG Semicon, and Hyundai -- to curb capital spending. Plans for many other plant expansion projects in Asia and Japan are also being re-examined, say sources in the semiconductor equipment industry.

Chip companies in Europe and the U.S. are trying to anticipate what hard decisions will be made in the Far East. "The best thing we can do is prepare for a range of possibilities that might occur," said Hector Ruiz, president of Motorola Inc.'s Semiconductor Products Sector in Austin, Tex. He does not anticipate his company altering any significant new manufacturing plans because of the unfolding conditions in Asia, but Motorola is now attempting to map out a range of options that could be taken if conditions dramatically change in the Pacific Rim.

"There is a lot of capacity in Asia that may or may not get used," Ruiz added. One clear option already being taken by major semiconductor manufacturers is greater use of third-party silicon foundries. "Our exact capacity strategy remains a big question for us in 1998," said Dwight W. Decker, president of Rockwell Semiconductor Systems in Newport Beach, Calif. "There is lots of capacity available now in the foundry market and prices have come down to the point where you can get pretty much anything you want at a good price."

Rockwell currently uses outside foundries to produce a little less than half of its semiconductors. Decker wants to eventually move more of Rockwell's production in-house - fabricating about 70% of its ICs internally. The company has completed the shell of a new wafer fab in Colorado Springs, Colo., but it has not yet equipped the facility. "That is the platform for adding internal capacity. We will just dial the needle to adjust how much internal vs. external capacity we want," Decker said.

Foundry operators are seeing an increase in business now with large semiconductor companies, partly because of market conditions but also because of long-term trends toward greater use of third-party manufacturing, said Tom Gurnee, president of Chartered Semiconductor Manufacturing Inc., the U.S. subsidiary of Singapore's silicon foundry.

Even so, 1998 is difficult to gauge for the foundry managers because of all the uncertainty surrounding wafer fab capacity. "It is quite murky to me and our customers, particularly in the first half of 1998," Gurnee said. "I don't think anyone foresees a crash or anything like that, but there is a lack of visibility."

While chip managers attempt to sort out the impact of Asia's financial crisis on global fab capacity, they are also trying to keep up with the strong increase in consumption of semiconductors by end-equipment markets. Semiconductor revenues are expected to increase by 16% to $159.6 billion in 1998 compared to $138.1 billion in 1997, when chip sales grew by only 5%, according to market researcher IC Insights Inc. of Scottsdale, Ariz.

Chip purchases by computer and telecommunications systems manufacturers will grow by 18% in 1998, based on IC Insights' forecast. In the coming year, chip suppliers will ship $80.9 billion worth of semiconductors to computer systems makers and another $28.2 billion to those turning out telecom gear, said the research firm. Demand from consumer electronics companies will grow 7% to $23.4 billion, while industrial applications will gobble up 13% more semiconductor parts worth $16.2 billion in 1998, predicted IC Insights. Semiconductor revenues from automotive applications will grow a healthy 18% to $9.7 billion, according to the research firm.

But there are some weak spots. One key chip market potentially threatened by economic weakness in Asia is cellular telephones. "I won't say we are concerned, but we are watching it very closely," said Richard M. Beyer, president and CEO of VLSI Technology Inc. in San Jose. "It doesn't appear to me that it will slow down. The bulk of Asian sales of mobile phones is in Japan and the People's Republic of China. Currently, it doesn't appear that China is being impacted by the economic turmoil in Asia. In Japan, I'm encouraged by plans to cut taxes to stimulate consumer spending."

Personal computer growth continues to pleasantly surprise many chip managers. "Everyone is looking for the next PC. I think the PC is the 'next PC,'" quipped John East, president and CEO of Actel Corp. in Sunnyvale, Calif. He added that the new market driver is the PC with "more speed, more features, more memory, and more of everything."

Lower-cost PCs are helping to drive up semiconductor unit demand, a trend that is expected to continue in 1998. "That is putting a lot of pressure on PC makers, and from our perspective it will drive the need for higher levels of integration," said Ronald C. Norris, a member of the office of president at silicon foundry giant Taiwan Semiconductor Manufacturing Co., who is based in San Jose.

The PC market is also driving high-speed modem sales. With a new 56-kilobit-per-second modem standard finally coming in 1998, Rockwell's Decker sees a much better year for that product in the year ahead. Pricing competition between rival 56-Kbps modem formats caused lower-than-expected revenues in 1997. "We are expecting much better growth in 1998," Decker predicted. "We've already started to see it pick up in the fourth quarter of 1997."

But not all managers believe the personal computer will continue to drive new growth like it has in the early 1990s. "Coming out of the 1990 downturn, the PC motherboards fueled strong growth for DRAMs and microprocessors," noted Jean-Philippe Dauvin, vice president and chief economist for SGS-Thomson Microelectronics in Paris. Now, he said, "1998 could be the first year of a new pattern, in which PCs grow at 15%-to-20% per year vs. 42%-to-45% in the early 1990s."

While the consumption of microprocessors and DRAMs by PC motherboards will continue to be significant, Dauvin expects to see a wide range of other applications taking over as industry drivers, starting in 1998. These applications include new telecom systems, automotive electronics, smart cards, and digital consumer products, such as advanced set-top boxes for digital TV.

"The next cycle - 1998 to 2002 - will be more oriented toward mass-market products," Dauvin predicted, "and that shift could change which semiconductor companies are driving the industry."

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