Alas! Poor Margin! I Knew Him, Horatio

Inventory correction or cyclical downturn? That is indeed, the question.

Alas, it's not "I knew him well," you morons! It's "I knew him, Horatio."Those of you who familiar with me know I have a some-time affinity for borrowing from the Bard — that’s William Shakespeare, for all you techie left-brained types — for this editorial space. So I can’t help but suggest that the chip industry is headed for the winter of its discontent.

Of course, it really depends on whom you ask. Wall Street seems to be divided on the issue as to whether current market conditions are a correction or a downturn, even as many companies and executives swear to the former. And regardless of which it turns out to be, it appears as if the equipment and materials suppliers are once again going to prove fortune’s fools.

Of course as an observer of the chip industry, it’s easy to point out that this is hardly a new situation or business climate. It engenders all of a writer’s favorite cliché’s: the more things change, yada yada yada; those who don’t learn from history, blab blah blah, etc., etc. So I’ll skip the pontificating rhetoric and do my humble best to cut to the chase.

I think it’s too early to call it for sure, but before you accuse of me wimping out, there is evidence that this is indeed an inventory correction. But it may prove to be a painful one for some.

Aside from all the wishful thinking and public statements meant to appease investors and boards of directors, there is some heartening evidence. Graphics chipmaker ATI Technologies, for one, surprised Wall Street, and probably just about everyone else, with its strong quarter, in the midst of what has become a daily stream of downward guidance and preannouncements for calendar Q3, and, shall we say, reluctant, guidance for Q4.

Part of ATI’s good fortunes could be attributable to market share gains, but certainly not all it. So all those graphics chips must be going somewhere. The same could be said of Advanced Micro Devices. It managed to put in a solid quarter as well despite a drop in its flash business; the jump came from growth in processor sales across all of its markets.

Alas, Electronic News, we hardly knew ye: RIP.Now one could argue that market conditions just haven’t caught up with the likes of ATI and AMD. That might be true. Or maybe its just companies that begin with the letter A.

In any event, regardless of whether this is a downturn or a correction, you know there are a lot of chips floating in the channel when your flash business goes down.

But beyond the chip industry, the electronics industry doesn’t seem to be taking the hit that the chip industry has this past quarter. Orders and shipments of printed circuit boards remained in a healthy state as we headed into the final month of calendar Q3. The numbers for North American suppliers would seem to reflect a normal seasonal slowdown, but nothing like what seems to be happening farther up the food chain in the semiconductor biosphere.

This would indeed suggest that what’s happening now is an inventory correction, and the view that the upturn still has legs may indeed be right. A dash of market milk of magnesia and the order digestion will be over.

How Poor Are They That Have Not Patience!

But even if this inventory correction scenario is true, it would seem that Banquo’s ghost will still haunt the equipment and materials suppliers’ party for some quarters to come. As market researchers VLSI Research and Gartner Inc. have been pointing out for sometime now, the industry has once again ramped up a lot of capacity over the past 18 months. A LOT. So much so that VLSI warned months ago that the industry may be overheating.

In fact, Gartner just updated its forecast for equipment spending, noting that 2004 is one of the best years on record, even slightly surpassing the high end of its guidance back in July at Semicon West. But what goes up must come down; while capital equipment spending is on pace to grow 66 percent this year, the market researcher expects equipment spending to decline by 0.6 percent next year, followed by a 16.1 percent decline in 2006.

As Gartner semi equipment analyst Dean Freeman suggested to me, there seem to be two possible scenarios. On one hand, we will have zero growth through 2005 as the industry ramped capacity quickly and now can add it only as needed to meet demand. But the industry will likely move into overcapacity by the end of 2005, simply because it is just plain difficult to manage demand cycles, Freeman observed. History certainly bears that out.

It is also possible that some chipmakers booked early in order to insure order slots and now are pushing them out until they need them, Freeman added. Golly gee whiz, imagine that. That surely has never happened before, huh?

On the other hand, growth could be slowing as a result of slackening demand in the wake of macroeconomic forces, Freeman said. The market has been able to respond quickly and therefore, equipment order push outs. Demand will return as consumer confidence improves after the election and oil prices drop from $50 a barrel to a more reasonable $40 to $45 per barrel, thus freeing up discretionary income. 2005 and 2006 are then slow, with stronger growth rebounding in 2007, he theorized.

Of course, if you’re as cynical as I am, you suspect oil prices will drop before the election, but that’s another topic altogether.

In any event, be it downturn, correction, whatever label you want to ascribe to it, equipment and materials suppliers are likely to have a tough time of it, at least for the next several quarters or so.

Chasseriau's interpretation of Shakespeare's witches in Macbeth.So if you make process or test equipment, or supply materials, I would suggest trying the following process recipe to conjure up the ghost of early 2000:

“Eye of newt, and toe of frog,
Wool of bat, and tongue of dog,
Adder’s fork, and blind-worm’s sting,
Lizard’s leg, and howlet’s wing,–
For a charm of powerful trouble,
Like a hell-broth boil and bubble.”

But I should warn you that this might prove a yield bomber; I don’t know how well a plasma-induced cleaning process removes newt eyes and such from the inside of a process chamber.

Editor’s Note: As explained at length elsewhere on this site, this is a news story written by me that originally appeared on the now-defunct Electronic News’ website, which is long gone. It’s former sister pub Electronic Design News (EDN) currently holds the copyright to all Electronic News copy (to the best of my knowledge). You can still see a copy of this story at EDN.

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