Analysts Predict Mild 2005 Recession for Semiconductors

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 all will play a role, said analysts at Semico Research on Monday.

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.

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