In the end, the year 2000 proved to be a classic case of too much of a good thing for semiconductor component suppliers. It started with the perfect scenario: insatiable demand from the networking and wireless equipment markets gobbled up semiconductor supplies, drove factories to run at full throttle, and led many chip makers to raise capital spending budgets.
Just as some pundits warned, OEMs and contract electronic manufacturers hurt by the scarcity of some key components stockpiled parts, helping to create the illusion that the industry expansion would continue unhindered for several quarters more. As a result, no one was prepared for the letdown that began in the PC segment, and swept the industry in the last quarter of the year.
"Expectations from companies and the financial community were that we were going to have this silicon cycle that was going to last longer and be more robust," said Jim Feldhan, an analyst at Semico Research Corp., Phoenix. "In fact, we've had [Federal Reserve Board chairman Alan] Greenspan trying to slow the economy, and he's done a good job of it."
To some industry pundits, including analysts at IC Insights Inc., Scottsdale, Ariz., last year's inventory debacle, the cooling U.S. economy, and the possibility of excess capacity as new plants come on line in 2001, have set the stage for the next downturn.
Yet most industry executives don't think the semiconductor market is staring down an abyss. While supply and demand imbalances still exist, they contend that the problems that surfaced in the fourth quarter represent only a minor blip --a mid-cycle correction -- that will quickly work itself out and allow growth to resume, if at a somewhat slower pace.
Jean-Phillipe Dauvin, group vice president and chief economist at STMicroelectronics, Geneva, believes 2001 growth will be between 25% and 27%, and will remain in double digits through 2002.
Analysts at Semico aren't so optimistic, however. Though the research firm sees the upcycle continuing, it has lowered its 2001 semiconductor growth forecast to 18% from 23%, according to Feldhan. "It's not a disaster," he said. "But when you're coming off a near 40% growth [in 2000], that's a little bit of a shock."
Industry executives interviewed recently stood behind Dauvin, though many of them had a list of factors that could derail their optimism.
"As long as the overall economy stays healthy, then all the numbers are big numbers, and all the end equipment still needs silicon," said Kevin Meyer, vice president of worldwide development at Singapore-based foundry Chartered Semiconductor Manufacturing Pte. Ltd.
With foundries eagerly ramping new fabs, integrated device manufacturers may be comfortable cutting back their own capital expenditures, which would help keep the market balanced, Meyer said.
Meanwhile, executives at NEC Electronics Inc. are concerned that the $2 billion budgeted for capital expenses this year may not go far enough to satisfy customer demand for semiconductors, particularly at the 0.13-micron level, according to J. J. Yamaguchi, vice president of marketing for System LSI products at NEC in Santa Clara, Calif.
If it takes longer than expected for new 300-mm fabs to ramp, the industry may avoid a sudden jump in capacity, which should keep wafer prices strong, Semico's Feldhan noted. Some chip suppliers are hopeful that slower overall growth, coupled with new capacity, will enable them to negotiate lower foundry pricing, said Barry Chaffin, director of product marketing at Triscend Corp., Mountain View, Calif.
DRAM prices -- which hit rock bottom toward the end of 2000 when the expected back-to-school and holiday PC sales failed to materialize -- will not soon recover, according to Semico. Consumers won't be in a hurry to buy new PCs, despite the new crop of gigahertz-speed processors, until broadband Internet access is widely available, and at a more palatable price, according to NEC's Yamaguchi.
While DRAM has seen its share of ups and downs in the past year, SRAM remains supply-constrained, said David Bagby, director of SRAM marketing at Samsung Semiconductor Inc., San Jose.
"It used to be that when DRAM went down, SRAM would follow about six months after, because DRAM makers would shift production over to SRAM," Bagby said. Now DRAM suppliers are transferring capacity to microprocessors or ASICs. In fact, few of the major SRAM suppliers of the past are strong players today, he said.
Furthermore, SRAM is less a PC-driven segment than in years past, finding the bulk of its use in telecom, networking, and industrial applications, where density requirements run the gamut, from 256 Kbits to 16 Mbits, and voltages range from 5 to 1.8 V, he said.
Also, if DRAM continues to be soft in 2001, more wafer capacity will be available to meet SRAM demand, Bagby said. The wild card will be Rambus DRAM, which is dependent upon sales of Intel's P4 processor and supporting chipsets. If the P4 takes off, RDRAM will become a factor in the DRAM market, helping to lift profit margins for manufacturers equipped to supply it, he said.
Emerging applications such as digital consumer and handheld computing products that hang off of the Internet, and consumer components from all sectors of the industry, will continue to gain market share and may eventually replace the PC as the main revenue generator in the chip market, industry executives said.
Cirrus Logic Inc., an analog IC and DSP supplier in Austin, Texas, plans to take advantage of projected growth in Internet appliances, said a company spokesman. "PC-free access to Internet and digital content is really going to be hot," he said.
The convergence of PC functions, stereo, video streaming, and television into an entertainment device that sits in your living room will probably not make a wide-scale debut in 2001, but consolidation of different media devices will continue, analysts said. The challenge will be to determine what consumers will buy, they said.
"Multimedia devices will have to push out, retrieve, and play in dozens and dozens of formats," said Richard Doherty, an analyst at the Envisioneering Group, Seaford, N.Y. "There'll probably be some consolidation in 2001, but throughout the year, multimedia technologies will have to continue to be very versatile for codec, graphic overlays, media streams, and text messaging."
While supply issues are not expected to be a concern in the short term because of slowing demand for chips from the PC market, Doherty said component shortages could resurface later in the year as the industry resumes its upward swing.
"For the last six months, the closer your product piggy-backed on the PC economy, the better the chance you could get all of the parts you needed," Doherty said. "With the PC glut of the fourth quarter, it's probably a safe bet that, in the first half of 2001, power supply, connectors, and other parts, will be available."
When the final numbers for 2000 are tabulated, observers believe cellular handset sales will likely have increased by 50%, to more than 400 million from about 275 million in 1999.
Though the industry may not witness a similarly strong growth pace in the next few years, the wireless market will still expand by about 40% in 2001 and will remain one of the fastest growing segments of the chip industry, according to Bill McClean, an analyst at IC Insights.
Wireless handsets had a compound annual growth rate of 60% from 1995 to 2000, McClean said, but will post a CAGR of only 22% for the next five years. The segment will continue to provide opportunities for OEMs and semiconductor suppliers but will experience a "growth recession" for the next few years, McClean said.
The situation may change with the rollout of 3G cellular platforms, which are designed to provide increased bandwidth and services that will include data and video. The wireless market may be reinvigorated by 3G-enabled phones as commercial trials of the systems begin in early 2001 in Japan and Korea, followed by Europe during the second quarter and the United States in the third quarter of 2002, according to Monterey, Calif.-based Web-Feet Research Inc.
If consumers are sufficiently impressed with the new handsets and associated services, it could increase the growth rate, allowing the market to ship as many as 1 billion units some time between 2003 and 2005, according to forecasters.
Semiconductor manufacturers are jostling to position themselves as the main supplier of components into the potentially huge 3G market. Texas Instruments Inc., Dallas, currently holds a majority position in baseband processors for handsets, but the past year has seen aggressive moves by rivals such as Intel, Motorola, and Analog Devices.
The promise of next-generation cellular and Internet devices will be a boon to the file-storage-type flash-memory market, said Mark D'Arcangelo, strategic marketing manager at Hitachi Semiconductor (America) Inc.'s System Memory business unit.
"More and more applications are incorporating slots for small-form-factor flash cards," like the MultiMedia Card that Hitachi is promoting, D'Arcangelo said. The adoption of products that use removable flash continues to thrive despite a general slowing in consumer spending, he said. Also, new flash capacity being brought on line by Toshiba and SanDisk will help to loosen supply in 2001, bringing equilibrium toward the end of the year, he said.
The code-storage area of the flash market has seen a similar surge in demand, while the slowdown in the chip market is freeing up capacity for fabless firms such as Silicon Storage Technology Inc., said Bing Yeh, president and chief executive of SST, Sunnyvale, Calif.
Meanwhile, OEM interest in configurable processors and programmable logic has risen as entrenched PLD companies focus on the configurable system-on-a-chip market. Another exciting trend in programmable logic is the emergence of embedded PLD cores. Although they won't be much of a factor until 2002, what they offer-in new types of ASIC designs with more flexibility and lower manufacturing cost-will drive design wins throughout 2001, said Dennis Kish, vice president of marketing at Actel Corp., Sunnyvale, Calif.
With additional reporting by Darrell Dunn, Bruce Gain, and Jeanne Graham.