Economy Chips Away at Semi Industry

Global sales of semiconductors dropped by 2.8 percent in 2008, according to a sales report released Monday by the Semiconductor Industry Association (SIA). It is the first decline in worldwide sales since 2001, the organization said.

Total sales for 2008 were US$248.6 billion, down from $255.6 billion in 2007. The SIA attributes the slowdown in sales to the current global economic downturn.

The final months of 2008 proved the most challenging for semiconductor manufacturers with a drop of about $3.5 billion from November to December, a nearly 17 percent fall. Year-to-year, sales fell sharply in December — the final month of 2007 saw $22.3 billion in sales, while December of ’08 rang up $17.4 billion, a decline of roughly 22 percent.

“If you go back and look at the first 9 months of 2008, we had 5 percent growth. Then the financial turmoil began. [The decline in semiconductor sales] is only significant in that it reflects what the economy is doing. The underlying demand for semiconductors is very strong, here and in markets around the world,” George Scalis, president of the Semiconductor Industry Association, told the E-Commerce Times.

Market Woes

The semiconductor industry is experiencing a major inventory correction due to the economic situation, said Ian Lao, an InStat analyst.

“It’s nowhere near as bad as the inventory correction of the early 2000s, where there was a 4 percent decline. I expect this one to be somewhere around 2 percent and change. One reason is that this slowdown is completely different. In the early 2000s, it was a supply-side issue. We had come out of a downturn prior and manufacturers had built up inventory for a perceived demand in the future,” he told the E-Commerce Times.

The current decline is not only a demand-side issue, from both the consumer and the OEM (original equipment manufacturer) side. What makes this time different, Lao said, is that while there appears to be enough demand out there, consumers and OEMs are not able to find the credit and financing needed to buy the things they want.

“Besides consumers being unable to get credit, OEMs are having difficulty getting the operational credit for things like manufacturing and research and development,” he noted.

The economic downturn has squeezed the resources available to OEMs. Where normally they would seek credit to finance their manufacturing, fewer banks are currently lending. At those which are lending, the available rates make borrowing money not worth the while, Lao stated.

Not Out of It Yet

The 22 percent drop-off in sales during the holiday period is the most significant number in the SIA’s report, according to Lao.

“A lot of companies make the bulk of their profits during the holidays. The decline hits the device makers first and much more than semiconductor producers because of the lead time involved in producing their products,” he pointed out.

For that reason, the industry has not seen the bottom of this decline.

“The dynamic you would expect for a normal cycle of decline and growth is either supply-side or demand-side driven. For this one, the grease that moves everything along — credit/money — is not there. The whole lending side has screeched to a halt,” he said.

While semiconductor manufacturers are doing everything they can to balance their pipelines, nothing is being consumed, Lao said. Burned by the previous inventory correction, OEMs will not keep factories open just to keep people employed. Intel, for example, already announced thousands of layoffs.

It’s now up to the companies to match inventory to demand. “It means in many cases, if not furloughing, then outright layoffs. We could see some companies close. In the memory market, for instance, you will see a lot of companies … merging,” Lao stated.

Keeping R&D Strong

While workers bear the brunt of the market decline, smart companies will not touch research and development (R&D), Lao said. While departments including marketing, accounting, manufacturing and sales might be cut by 3 percent to 4 percent, R&D might take a 1 percent to 2 percent hit. While any layoffs discourage employees, companies making large cuts in R&D run the risk of especially demoralizing workers.

“AMD, Intel and any of these fairly sizable companies will not touch R&D. Projects already online will continue. They may push out projects scheduled to start in 2010 or later. Or, they may push even harder to complete projects to have products ready at the end of the downturn,” he said.