The semiconductor market is drowning in chips

Semiconductor producers are starting to feel the effects of bloated inventories. The industry has been hit by the dot-com crash, a slowing economy and sluggish consumer demand.

The semiconductor industry posted a record $204 billion in sales last year. However, with the market flooded with the leftovers from fallen dot-corns and consumer spending down, the industry is bound to see a decline in sales of at least 20 percent this year.

Orders for silicon semiconductors started falling late last year, and are virtually falling off a cliff since the beginning of this year. Companies such as Cypress Semiconductor Corp. have seen first-quarter revenues drop by 29 percent compared to last year's fourth quarter. The industry as a whole is off 18 percent for the first quarter, and many of the larger players, such as Intel, are not forecasting a turnaround any time soon.

The dot-com crash is the source of the semiconductor surplus. These technologically-focused companies, which were previously loaded with cash, stocked up on technology products. Customers failed to materialize and venture capital dried up, so now the market is overflowing with the remains from these companies. Leftover items can be found on eBay and at sales events such as Ableauctions.com Inc.'s "Death of a Dot-Com."

Waning consumer demand is yet another factor affecting semiconductor sales. Sales of personal computers is the largest source of demand for computer chips. The industry will have to cope with only a 5.8 percent increase in sales of PCs worldwide. More critical, is that unit sales in the United States are expected to fall 6.3 percent this year. Mark L. Edelstone, a Morgan Stanley Dean Witter & Co. analyst says, "If gross domestic product growth falls below 1.5 percent, semiconductors could contract by more than 20 percent this year."

Communications markets, which are the second-largest source of semiconductor demand, are suffering as well. For every unit of inventory held by a PC firm, there is at least three times as much sitting in the warehouses of communications makers.

If demand for semiconductor equipment turns around and the equipment makers can sell off their remaining stock, the chip market could rebound sometime later this year. But even if this best-case-scenario comes true, revenues will not reach the levels they were last year, until 2003.

Semiconductor companies are continuing to increase production of chips, but now indicate that profit growth will not be realized for quite some time. The industry is still pushing forward, which keeps the surplus danger alive. If too many chip makers introduce a new "fastest chip on the market," overcapacity is nearly inevitable.

Source: Hoovers.com, BusinessWeek