Chip industry sees bottom, strong growth in 2003

The semiconductor industry will regain much of the ground it has lost this year. But it will take until 2003 when the industry could see a 30 percent sales growth level according to Dataquest in San Jose. Meanwhile, executives at Intel and Micron Technology also indicated that the worst may be over for the chip industry. This year, the chip industry is experiencing a 35 percent revenue shrinkage to $147 billion, almost double the previous worst year-to-year decline of 18 percent in 1985.

Dataquest said 2002 will be a year of slight recovery with overall industry sales growth of 3 percent to $152 billion, before growth will once again be in the 30+ percent range it has been during typical expansion years. "The slowdown in capital expenditure in 2001 will likely spill over into 2002, resulting in supply-side tightness in 2003, when a stronger demand side is expected to return to the market," said Richard Gordon, principal analyst for Dataquest's worldwide semiconductor group.

The engines of growth that will drive the next boom in chip sales will included a PC replacement cycle and a recovery in the wired communications sector. In addition, the new generation of 2.5 generation and 3G cellular phones will be in strong demand in 2003, boosting demand for silicon-rich handsets. These next-generation mobile phones boasting intensive data services, such as Web surfing, e-mail, e-commerce and voice recognition will require faster processors and more flash memory and other types of chips, which will help the chip industry.

Other signs that the chip industry has reached the bottom of the recession include optimistic forecasts from Intel executives during a webcast last week.

At Intel, CEO Craig Barrett and several other key executives held a web conference to talk about their business and future plants.

Barrett defended the company's decision not to cut back on either the $3.7 billion in R&D or $7.5 billion in capital investments it had budgeted for this year, despite the drop of in PCs and other high high-tech sectors.

The new plants will result in higher profits and increased market share once the market turns around Barrett said. "We absolutely understand that technology never slows down, even during a recession. Our strategy here is new products, new technology and building blocks for the Internet."

Intel, said Paul Otellini, who runs Intel's Architecture Group, which include its PC-related businesses including microprocessors, is determined to regain the ground it lost to AMD and others in the microprocessor market these past two years. "We are absolutely deadly focused on growing our market segment share."

Otellini said that by the third quarter of 2002, Intel will have completely shifted its product line to the Pentium 4 level and the state-of-the-art 0.13 micron production process. Intel will ship a Pentium 4 chip running at 3 gigahertz in 2002, Otellini said. By the fourth quarter of 2003, Otellini said the average cost of building Intel microprocessors will fall 25 percent from the fourth quarter of 2001, driven principally by the move to 0.13 micron production and larger 300 mm silicon wafers. 

Barrett added that by the end of this year, four of Intel's 13 chip plants will use 0.13 micron technology. Production using 300 mm wafers is scheduled to come online in 2002 Barrett said.

In the market for high-powered servers, Otellini promised three new Xeon-class processors developed under the code names code-named Prestonia, Foster and Gallatin. They are due out in the first, second and third quarters, respectively.

In Boise, Idaho, Micron Technology announced that orders for its chips have strengthened since the quarter ended in August, due to a sharp increase in the average amount of memory built into new personal computers. "Orders have been stronger over the August quarter so far to date. The memory per box content has grown considerably since August," said spokesman Kipp
Bedard.

The increase in memory is the result of several factors, including the very low cost of memory, which is enabling computer makers to attract buyers with systems featuring far more memory that came with a standard PC just a few months ago.

The trend is also driven by the higher demand for memory by Microsoft's new XP operating system. It is recommended that XP PCs have 256 megabits of memory, far more than the 128-megabit chips that has been the norm in most PCs this year.