Chip Vendors Skittish About Potential Industry Bubble

At the Semicon show in San Francisco, semiconductor industry vendors and analysts worry about the strength shown by the electronics market.

SAN FRANCISCO—Analyst concerns about the recovery of the technology market were echoed by attendees on the floor of the Semicon West 2004 show, which covers the technologies and services used to produce computer chips. While exhibits packed the venue here to capacity, there looked to be more vendors than potential customers strolling the aisles.

With two venues in as many cities, Semicon West opened its doors on Monday, focusing on the manufacturing of semiconductor wafer fabrication, or "fabs." On Wednesday, the shows second half starts in San Jose, Calif., covering the interconnects and packaging used in the final processing of chips. More than 1,500 vendors are showing at the combined event.

"Everyone is nervous that were heading into a bubble," observed Dick James, senior technology analyst with ChipWorks Inc., of Ottawa, Ontario. He said the attendance and interest from attendees at the show was "fairly quiet," but still better than two years ago.

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Earlier on Monday, however, Merrill Lynch & Co. had knocked its rating on the entire sector several notches from "overweight to "underweight, expecting lower-than-expected demand for both personal and enterprise systems. The firm also downgraded industry bellwether Intel Corp., which will announce its quarterly results on Tuesday.

However, some attendees were upbeat. "This is the best this show has been in 3 years," said Jim ONeil, a sales representative with Weldaloy Products Co. of Humble, Texas, who has attended Semicon for more than a decade. His company offers machining and materials services to the industry.

"Were in a slow growth cycle," countered Gary Firment, laser specialist with California Lasers Inc. of Simi Valley, Calif. "Six years ago this place was packed, even on Day One. So many people got caught [in the last downturn] that there are fewer startups now, fewer entrepreneurs. The industry isnt growing fast enough to absorb all the people that are looking for jobs right now."

On the show floor, crowds were evident around the Metron Technology NV booth. The San Jose company handles outsourcing in the chip industry. Earlier in the month, the company reported fourth quarter results of $62.2 million, up from $52.7 million in the previous period.

Some attendees said many of the new products shown at Semicon—several pointed to the hype around nanotechnology advances in processor manufacturing—were aimed at high-volume production, larger wafer sizes and new fabs. The new processes were too pricey for smaller companies, they said.

"Theres nothing really new here," said Brad Cantos, director of wafer and die operations with Novalux Inc., a semiconductor laser vendor based in Sunnyvale, Calif. He said many smaller companies were looking at the stockpile of used equipment on the market and extending their current fabs, rather than investing in new equipment.

Cantos experience tallies with figures from industry observers. Analysts at the show said that in 2000 some $38 billion of new fab construction was ordered, but with the downturn it was never installed and put on the market. About 100 fabs may upgrade or expand operations this year, according to Strategic Marketing Associates of Santa Cruz, Calif.

According to Firment, there is an easy test to gauge the state of the electronics industry. "When silicon gets scarce, then the market is hot. But its cheap right now. Thats a sign of a tough market, one thats still contracting."

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