"I am not a believer in the V-shaped recovery graph," said Dan Niles, senior semiconductor analyst for investment-banking house Lehman Brothers, referring to the quick-recovery forecasts. "I think it will be more like a bathtub-shaped, or an L-shaped, one," with a long, flat bottom.

Speaking at the Fabless Semiconductor Association's State of the Fabless Industry luncheon here Tuesday (April 3), Niles said the current downturn could be the worst the market has seen in several years. "This is not 1996, and it definitely is not 1998. The current downturn is more like what we saw in 1985," he said. "It's going to be long, it's going to be painful and it's going to last for a while."

Historically, the ups and downs of the semiconductor cycle have been pinned to an excess of manufacturing capacity. But Niles said this slump is worse because it combines both overcapacity and slackening demand. As a result, Niles expects total sales for the semiconductor industry to fall some 10 percent this year, with the DRAM segment taking the hardest hit and declining more than 20 percent from 2000's totals.

He sees weak demand in all major end-use categories, notably the PC and both wireless and wired communications, leading to a glut of inventory. This will eventually back up the channel to the companies and lead to price cuts, which will further hinder already weak sales, Niles said.

On top of this are fab utilization rates that have fallen to the 70 percent range, which means the foundries are scrambling for business and the big chip companies are seeing their expensive fabs sit idle. "The upturn is still not visible," said Niles, "and I would say it is still getting worse."

Niles presented his forecast alongside the release of the FSA's newest wafer demand survey, which painted a similar picture. "Daily, things are changing, and unfortunately for the worse," said Jodi Shelton, executive director of the Dallas-based trade group. While she said the fabless-chip market remains healthy, and the fabless companies are posting better returns than the semiconductor market overall, her study shows a drop in silicon consumption.

From the last quarter of 2000 to the first quarter of 2001, the FSA tracked a 13 percent drop in wafer consumption, the first negative report since the group began monitoring silicon use. Revenue fell 21 percent in the same period, the FSA said, as average selling prices were pummeled by slack demand at the end-user level.

While the FSA report shows improvement for the rest of the year, this could be misleading. Shelton pointed out that the forecasts were derived from data submitted by the companies in late 2000, before the depth of the current slump was apparent to many.

Discomfort grows

"We are not at all comfortable about the numbers for the rest of the year, because there seems to be so little visibility going forward," she said. "I think our forecast is much too optimistic, and will probably have to be scaled back. We could see a bigger decline than the companies have reported so far."

Jim Kupec, president of UMC Group's U.S. operations, has also seen a major dip in wafer orders. "It's like we have gone from 100 miles an hour to 10 mph, in about 10 feet," he said. "There has been a terrific deceleration going on." Kupec reported that UMC's facilities are running about 75 percent full, compared with 98 percent at the end of 2000, and pinned the decline on the dual drops in cellular phone shipments and PC components.

"This is absolutely the steepest descent of business in our industry, ever," said Bruce Freyman, corporate vice president for product operations at packaging powerhouse Amkor Technology Inc. "Everyone is collectively reeling from this recession."

Despite these gloomy assessments, not everybody was as pessimistic as Niles, and several chip executives said they expect to see some hint of recovery by the end of this year. "I think these doom theories are overplayed," said Faraj Aalaei, chief executive officer of Centillium Communications Inc. And with fab utilization down, Aalaei suggested that the fabless companies may be able to find a bright spot by negotiating better rates from their foundry partners.

Paul Costigan, chief executive officer of Massana Inc., saw another silver lining in the dark economic clouds. "On the upside, we can expect some fast turnaround from the foundries," he said.

However, even with the best-case scenario — a recovery at the end of the year — it is still likely that 2001 will show overall economic losses for the industry.

"I am pretty bearish, but I think Niles was too pessimistic," said Mark Edelstone, senior semiconductor analyst for investment-banking firm Morgan Stanley. He expects to see semiconductor sales slide by 15 to 20 percent this year, and with very low visibility into the future, he is reluctant to forecast any further than that.

However, Edelstone does not expect the protracted slump that Niles has forecast. While the overall economic picture is clearly resulting in slower purchases by end users, Edelstone expects to see an effect from the Federal Reserve's lowering of interest rates, boosting the economy and pumping up the sales of electronics.

"This is going to be a very severe down year," said Edelstone. "But we aren't going to see an industry-wide depression."