SAN FRANCISCO -- Dan Niles, the oft-quoted stock analyst turned high-tech fund manager, said here Tuesday (March 30, 2004) that underinvestment in semiconductor capital equipment over the past three years has created a favorable climate for semiconductor supply and demand.
Demand will be driven partly by pent-up requirements for information technology equipment at corporations worldwide, said Niles, now the chief executive officer of a Lehman Brothers company called Neuberger Berman Technology Management LLC, based here. Niles, who holds a master's degree in electronic engineering from Stanford University, was a technology analyst at Lehman Bros. from 1991 until last year.
"Business investment was weak in 2003," Niles said in a speech organized by the Fabless Semiconductor Association at the Embedded Systems Conference/eUSA conference here. Managers were scared off from investing by economic "false starts," caused first by the war in Iraq along with the SARS epidemic. Business capital investments, as a percentage of corporate revenues, is running at a tepid rate of 4.5 percent, which compares with 6 to 7 percent normally.
He predicted that corporate demand for PCs will be strong over the rest of this year, partly because "the slug of machines purchased by companies in 1999 need to be replaced." Similarly, demand for smart cell phones, networking equipment including voice-over-IP gear and wireless LANs are causing a rebound in the communications sector.
"Comms is turning the corner," he said, with inventories at Cisco, Lucent and Nortel now running in the 50-day range, down from 110 days at the bottom of the recession two years ago.
Niles looked back to the boom years enjoyed by the semiconductor industry in 1993 and 1994, when chip revenues soared by about 30 percent per year, explaining that the up-cycle followed "holes in capital expenditures" in 1991 and 1992. The chip industry is in a similar period now, with rebounding demand following three years of low capital expenditures. Moreover, because many companies in the equipment industry fired a significant portion of their work force, Niles said several of the large equipment makers are strapped to meet demand.
For the last three years, semiconductor companies have been "trying to make do with less, squeezing out production from whatever they had. Companies are tapped out of capacity. And all the capital equipment companies fired a lot of people," Niles said. As a result, capacity utilization is above 90 percent, and is particularly tight for leading-edge 130-nm capacity, which he said is essentially "sold out."
"We are starting to hear about people walking away from deals" that are less than favorable, he said. As the industry comes out of its second and third quarters, Niles said "pricing could do a U-turn, which is when things start to get really interesting."
Hiring also will rebound in the second half, he predicted. During the 1992-1994 period, hiring lagged the economic recovery, and a similar phenomenon is going on now. Corporate managers are still wary to add people or make major investments. But with Japan's economy doing better, and strong economic growth in both the United States and the Asia Pacific region, U.S. companies will begin to add people in the second half of this year, he said.
"If you are a manager who has just gone through a deep down cycle, human nature [dictates] that you still don't believe things are getting better. But hiring is going to come back," Niles said.
Asked when the next downturn would come, Niles said he is asked that question "all the time. I think it will be sometime in '06, not in '05."