Europe and East Asia are further complicating the already difficult task of pulling the electronics industry out of its slump.
Worsening overseas conditions are competing for the attention of executives in the electronics sector, who for months have been distracted by worries over the state of the U.S. economy. But after a series of interest rate reductions, inventory write-offs, and production cuts failed to engineer a hoped for turnaround, U.S. business leaders are quickly realizing that global forces are contributing to the tough market.
The emerging picture is not encouraging. Japan is sliding toward a recession, and European consumer and corporate IT equipment spending is no longer as robust as it appeared in the beginning of the year. On top of this, excess inventory has turned up in Europe, Japan, Korea, and Taiwan, threatening to postpone a market upturn.
"In the current quarter, we have experienced order cancellations and delays from some of our main customers, resulting in lower revenues and rising inventory," said Ulrich Schumacher, president and chief executive of Infineon Technologies AG, Munich, Germany, during a conference call with analysts. "Also, in DRAM, demand has been weak, especially in the PC sector, leading to higher inventory levels."
Infineon is only the latest major electronics company to warn about deteriorating conditions in its main market. Electronics companies in Asia and Europe, including Alcatel, Ericsson, Nokia, Philips Electronics, STMicroelectronics, Hitachi, Hynix Semiconductor, Matsushita, Samsung, and Toshiba have similarly suffered dwindling demand for their products, confirming sentiments expressed earlier by North American companies such as Cisco Systems and Hewlett-Packard.
What made Infineon's comments worrisome was that they confirmed the fact that the industry's house-cleaning operation is only half complete. For six months, North American electronics OEMs and component suppliers have struggled to reduce bloated inventories. Now their European rivals are just admitting the economic malaise has spread to their side of the Atlantic.
"The headline GDP figures for the world's two largest economies support the popular perception that the U.S. is suffering a sharp economic slowdown while the euro area is experiencing a gentler slowdown," said Bruce Steinberg, chief economist at Merrill Lynch & Co. Inc., New York. "The headline GDP figures, though, don't tell the whole story."
According to Steinberg, the U.S. economy is firmer "than commonly believed, while the underlying pace of euro-area domestic activity has been surprisingly weak."
This assessment, combined with the reality of slowing sales across Europe, is forcing many companies to revise their forecasts out of concern that scaled-down component demand could trigger a flood of inventory that would undermine remedies taken earlier this year in North America.
"We've been forecasting a semiconductor market decline of 18% to 20% in value in 2001, which already would make this the worst downturn in history," said Dan Niles, an analyst at Lehman Brothers Inc., San Francisco. "But this looks like it will be revised lower as well, given the ream of profit warnings in recent days from the sector."
DRAM vendors should also brace for the worst revenue decline in the market's history, according to Dataquest Inc., San Jose. The research firm last week predicted that DRAM sales this year will fall by more than half, to $14 billion from $31.5 billion in 2000.
"This gives a revenue growth rate of --55.5% for 2001, making it [even worse] than the 1985 year-over-year decline of 55.1%," Dataquest said in a report.
When Infineon, Philips Electronics, and STMicroelectronics, Europe's top three semiconductor companies, report their quarterly results in July, analysts say they will be looking for any signs that the companies' inventories are under control. The analysts may not like what they'll hear.
Take Netherlands-based Philips Electronics N.V. The company's inventory began rising early last year and topped $5 billion in June 2000, before falling almost $400 million by September. By the end of March, however, Philips' inventory had ballooned to $5.2 billion.
"There's too much inventory at a time when there is significantly less willingness by industry players to hold inventory," said Jan Hommen, executive vice president and chief financial officer at Philips. "In the first quarter, our inventory increased by about 200 million euro. In the second quarter, we expect it to decrease by about 100 million. The impact of these movements is quite substantial."
Infineon is in the same boat, though the company's inventories are expected to surge sharply this month, rather than decline slightly as in Philips' case. At the end of March, Infineon's inventory stood at $954.8 million, continuing an upward trend that began early in 2000.
Last week, Infineon told analysts a gloomy story of sliding sales, canceled orders, and rising inventory. Sales for the three months ending June 30 will decline as much as 30%, from $1.5 billion in the March quarter, resulting in a net loss of more than $500 million.
"Infineon's DRAM inventory levels have risen from five to seven weeks at the end of May to eight to 10 weeks, more than double the optimal client service level," Lehman Brothers' Niles said. "It's difficult to see how Infineon can reduce its inventory level without a turnaround in demand or a reduction in output."
With these recent developments, a rebound in demand this year is looking increasingly unlikely, industry executives said. To hasten the market recovery, semiconductor companies in Europe and Asia must further reduce output, write off more inventory, and cut capital expenditures, analysts said.
But industry participants are unwilling to act in unison on this prescription. While most North American electronics companies were quick to tighten up their inventory earlier this year with write-offs and rolling plant shutdowns, Europe is just entering this phase, while most DRAM suppliers, including Korea's Samsung and Hynix Semiconductor, are reportedly reluctant to cut output for fear of losing market share.
Some companies are trimming capacity utilization, however. Philips' plants were running at 75% of capacity at the beginning of the first quarter, but the company now plans to bring this down sharply.
"Utilization rate has declined, and we expect to end the [second] quarter at a level of approximately 45%," Philips' Hommen said.
Japan remains a wild card for the entire industry. Only Toshiba has indicated it wants to cut output by 30%, at a time when Japanese IC inventory is piling up due to low domestic demand.
In April, Japan's IC inventory index climbed to a 12-month high of 136.3 from 91.3 in April 2000. Japanese electronics companies may resort to price competition overseas to drive unit shipments, analysts said.
"The potential for Japanese component makers to exert pressure through increased exports to North America remains a concern," said Jerry Labowitz, a Merrill Lynch analyst, in a research statement.