Analysts see soft landing in first half of 2007

London -- As 2006 draws to a close, electronics executives face a slowing fourth quarter and the prospect of a seasonal lull in the first half of 2007. So fast-paced is consumer-driven electronics that visibility into the second half of 2007, which consumer seasonality would tend to make upbeat, is limited. The hope is for a strong second half, to recover ground lost in what is expected to be a lackluster first half.

Today's global indicators show a weakness developing, partly as the result of an inventory overbuild in mobile phones and partly in response to a slowing U.S. economy. The result is a series of downgrades in estimates for 2007, although one European analyst remains decidedly optimistic (see story, below right). At the same time, the slow-but-steady markets often favored by European companies, such as industrial electronics and automotive, are likely to continue delivering growth, even amid a slowdown for some of the big market movers in consumer electronics.

In October, the World Semiconductor Trade Statistics organization revised its estimate for the chip market in 2006 downward to $247 billion, or 8.5 percent annual growth. WSTS forecast that the market would increase 8.6 percent in 2007.

In November, the Semiconductor Industry Association in the United States also lowered its forecast through 2009. It now predicts sales of $248.8 billion this year, an annual rise of 9.4 percent, followed by jumps of 10 percent, to $273.8 billion, in 2007; 10.8 percent, to $303.4 billion, in 2008; and 5.8 percent, to $321 billion, in 2009. A compound annual growth rate of 9 percent is projected for 2006-09.

But that was before WSTS reported the three-month average of world chip sales: $21.9 billion in October, up from $21.37 billion in September but down nearly 8 percent month to month on a seasonally adjusted basis.

Sales of handset chips, PC chips, DRAM and NOR flash memory all fell sharply, said Bruce Diesen of Terra Securities ASA (Oslo, Norway). Indeed, the average selling price for handset DSPs fell 24 percent year on year, reflecting the move to low-end mobile phones in developing countries, he said.

As a result, Diesen trimmed his forecast for 2006 chip market growth to 8 (from 8.5) percent, but maintained a 7 percent growth call for 2007.

Jim Feldhan, president of Semico Re- search (Phoenix), has an even more sober view. He too pegs semiconductor growth at 7 percent for 2007, but that assumes average selling prices will decline just 1.7 percent per year. They actually fell nearly 6 percent in 2006, so Feldhan will probably have to pull his growth projection downward.

Cell phone handsets will be next year's biggest disappointment, declining from 20 to 8 percent growth, due in part to inventory buildup, Feldhan said. In addition, heated competition between Intel and AMD in X86 CPUs, and among flash memory makers, will lead to dropping prices in both markets, constricting them in the short term.

The good news, Feldhan said, is that 2008 looks great, with possibly 15 percent growth in semiconductors. The growth will come as cell phone inventories burn off and price drops in PC and flash parts eventually lead to an expansion in both markets.

Some industry watchers remain hopeful that the first half of the new year will see an inventory correction, similar to, and maybe softer than, the one that occurred in 2004 and 2005. No one is expecting the kind of meltdown of markets that occurred in 2001 and 2002.

"The big question has to be the U.S. economy, and it does look like it is slowing down," said Terra Securities' Diesen. While "Europe seems to be doing well," the U.S. slowdown since September "is showing up in the export numbers from Canada, China, Japan, South Korea and Taiwan."

At the same time, he said, the U.S. economy "is less strongly coupled to the world economy and the world electronics economy than it used to be, because the developing companies are a bigger share of the world economy."

As to a driver for sales in 2007, Diesen pointed to Microsoft Corp.'s Vista operating system. Vista has architectural hooks for the use of nonvolatile memory, which is likely to drive sales of flash memory into PCs and into PC peripherals.

The communications market is less buoyant, however. Despite the fact that wireless-LAN penetration continues around the world and WiMax is also expected to provide a kicker, high-end phones with their wider margins are proving less attractive in the West while low-end phones remain in demand.

"There's no [soccer] World Cup, no Olympics, no major product category launch in 2007," said Antony Sethill, CEO of Frontier Silicon Ltd. (Watford, England), who foresees a "difficult" new year. But Sethill, whose company makes DAB audio and mobile-video chips, remains optimistic for the long term, calling 2008 "the year when mobile TV takes off," he said.

-- Rick Merritt contributed to this story.