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Report: Chip Market to Fall 16.3 Percent in 2009, First Ever Two-Year Drop

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December 16, 2008

Report: Chip Market to Fall 16.3 Percent in 2009, First Ever Two-Year Drop

By Michael Dinan, TMCnet Editor

In a chilling sign of this economic recession’s potential reach, for the first time ever, global chip revenues are expected to decline in consecutive years, with a 16.3 percent drop forecast for 2009, according to Stamford, Connecticut-based IT market research firm Gartner, Inc.

The total revenue predicted – about $219 billion – is far below the firm’s earlier estimates for this year of about $262 billion, which itself marks a 4.4 percent drop from 2007. In a negative scenario, Gartner (News - Alert) says, the semiconductor industry could decline as much as 24.7 percent.
According to Bryan Lewis, research vice president at Gartner, while many executives may try to compare this downturn to the 2001 tech bubble, this downturn is different in many ways.
“This downturn is broad-based, not limited to only technology, has a much different growth profile before the downturn, and has far less inventory buildup,” Lewis said. “Inventory levels this time have been monitored and more tightly controlled throughout the entire food chain, and this will help the market come back more quickly than in 2001.”
The firm’s prediction – made in its $195 report, titled “Dataquest Alert: Semiconductor Revenue Plummets in 4Q08, Gartner Reduces 2009 Growth to 16%” – marks a turnaround from recent calls for a moderate slowdown in the semiconductor market.
About a month ago, Gartner predicted this year’s chip revenues to grow .2 percent and for a 2.2 percent decline next year. But the deepening financial crisis is having what the firm calls “an unprecedented negative impact” on this quarter’s sales. The firm is calling for a record quarter-on-quarter decline of 24.4 percent.
The news is disheartening but not altogether surprising: As TMCnet reported, the world’s largest computer chip-maker last month said it’s expecting to see at least $1 billion less in revenues for this quarter than first projected.
Officials at Santa Clara, California-based Intel Corporation said they’re expecting $9 billion in revenues for the fourth quarter – far less than a projected range of $10.1 billion to $10.9 billion. Profit margins are down more than 50 percent, the company says.
Intel (News - Alert) officials say tighter consumer spending in this slower economy has affected demand for its microprocessors.
According to Reuters (News - Alert), consumer demand for electronics, from computers to digital cameras, is drying up quickly amid the financial crisis and the prospect of a lingering global recession.
Even so, some – as TMCnet Group Managing Editor Erik Linask (News - Alert) reported – including VoIP services provider 8x8’s chairman and chief executive officer, Bryan Martin (News - Alert), say they hope the downturn will last only into early 2009.
For Gartner, the wild card for the semiconductor industry in 2009 is the dynamic access response memory, or “DRAM” market, which has been in a downturn for 18 months, with losses now approaching $12 billion.

According to Andrew Norwood, research vice president at Gartner, the DRAM market is so bad that suppliers must either significantly scale back supply, or the weaker players will be forced into mergers or bankruptcy.
“Either way, we are expecting DRAM pricing to firm during the second half of 2009, and this has the potential to moderate the decline in 2009 semiconductor revenue,” Norwood said. “Only widespread government support for the ailing DRAM vendors could avert this supply rationalization, and that would be a disaster for the industry as it would just prolong the current downturn.”

One light of hope, for Gartner, is that some companies facing such a difficult 2008 may have over-corrected to be on the safe side by keeping inventory levels at the absolute minimum.
“This leaves the door open for semiconductor sales in the first quarter of 2009 to be somewhat better than seasonally expected as some inventories will need to be replenished,” Lewis said.

Gartner expects the semiconductor industry to bounce back in 2010 and 2011, with worldwide semiconductor revenue hitting $251.2 billion in 2010, a 14.6 percent increase from 2009, and in 2011 revenue reaching $274.9 billion, a 9.4 percent increase from the previous year.

Don’t forget to check out TMCnet’s White Paper Library, which provides a selection of in-depth information on relevant topics affecting the IP Communications industry. The library offers white papers, case studies and other documents which are free to registered users.

Michael Dinan is a contributing editor for TMCnet, covering news in the IP communications, call center and customer relationship management industries. To read more of Michael’s articles, please visit his columnist page.

Edited by Michael Dinan

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