Analysts Predict Mild 2005 Recession for Semiconductors

By Mark Hachman  |  Posted 2004-03-15

Analysts Predict Mild 2005 Recession for Semiconductors

SCOTTSDALE, Ariz.—The semiconductor industry looks likely to enter a mild recession in 2005, an analyst firm said Monday, following a healthy recovery that will continue through this year.

According to analysts here at the Semico Summit, the slowdown in chip sales will be triggered by a number of factors, including lower sales of consumer electronics goods, the end of the latest PC upgrade cycle, a surplus of semiconductors and the onset of a general macroeconomic downturn.

"We can build a scenario where we have a recession," said Jim Feldhan, president of Semico Research Corp. in Phoenix. "It will be a mild one, but it will be a recession."

Semico and other economists examine the macroeconomic cycles of boom and bust, which tend to repeat every few years. In making its predictions, Semico analysts concluded that certain product cycles, including the PC and consumer-electronic equipment, are healthy and will contribute to positive growth during 2004. In 2005, however, those same industries will begin to decline. Furthermore, two macroeconomic cycles—the U.S. gross domestic product and semiconductor manufacturing capacity utilization—also could wane during 2005, Semico analysts predicted.

Semico predicts that the chip market will grow, on average, about 27.5 percent in 2004, potentially ranging as low as 20.6 percent and as high as 32.5 percent. The firm did not release predictions for 2005. Analyst firm Gartner Inc. predicts that the chip industry will grow 22.6 percent in 2004 and 13.3 percent in 2005, followed by a 2.3 percent contraction in 2006. The Semiconductor Industry Association, meanwhile, predicts a 19.4 percent growth rate in 2004.

While a recession following a two- to three-year recovery is not unusual, the effect on the U.S. technology economy could be unsettling. General unemployment has fallen slightly from its 2003 high of about 6.3 percent, down to 5.5 percent in January, according to the Federal Reserve. Productivity has consistently increased, as chip firms and other companies have made do with less while outsourcing low-level functions to India and other countries.

During this time, chip revenues have continued to climb. In the near term, OEMs may even face spot shortages of specific components, propping up the average selling price of electronic components, Feldhan said. But in 2004 and 2005, companies will begin production on next-generation 90-nanometer fabs that use 300-millimeter wafers, dramatically increasing their potential capacity compared to the 0.13-micron, 200mm fabs that are the norm now. The Semiconductor International Capacity Statistics (SICAS) survey of chip manufacturers found that the manufacturing capacity used during the third quarter of 2003 was 87 percent, the highest since the fourth quarter of 2000, the last boom year.

Next Page: Downturn ahead for PC, cell phone upgrade cycle

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Meanwhile, the industry has continued to benefit from strong sales of consumer items such as digital cameras, which enjoyed a phenomenal 85 percent increase in sales last year, Semico reported, slowing to a robust 31 percent this year. Although the PC market is largely saturated, notebook sales grew 9.1 percent in 2003 and are expected to grow 31 percent this year, Semico found. Cell phones grew 16 percent last year and should increase by 15 percent in 2004.

The problem, however, is that the recent cycle of PC upgrades could begin to slow. "We continue to see the PC and cell phone upgrade cycle in 2004, but what were concerned about is seeing that uptick abate in 2005," Feldhan said.

The firms final concern is the general macroeconomic climate. In January 2003, the Federal Reserve Board reported that the U.S. GDP increased by 3.1 percent. In 2004, Feldhan said, Semico predicts that it will increase by 4.2 percent.

In 2005, however, the U.S. economy could face its third straight year of a half-trillion-dollar deficit. The firm predicts that the Fed will raise interest rates, which would have a stifling effect on consumer spending. "We do feel that theres a black cloud out there concerning a macroeconomic slowdown in 2005," he said.

And that could continue to mean a discrepancy between the perceived health of the semiconductor industry and the loss of technology jobs in the United States. Bob Bailey, president and chief executive of embedded processor chip firm PMC-Sierra Inc. in Santa Clara, Calif., said his firm has outsourced low-level design jobs overseas, treating them as a buffer or an emergency repair crew. The majority of his design staff remains in North America, he said.

"The myth is that outsourcing is a low-cost kind of thing," he said, citing India and China as examples. "The reality is that you can suddenly ramp up 150 to 200 engineers extremely quickly, and ramp them down again extremely quickly."

"The economy is very strong; the question is how you create more jobs," said George Scalise, the president of the SIA, speaking at the summit here. "The issue is real, it has to be resolved, but it wont be easy."

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