The global industry will grow at 27% in 2001, predicted Jean-Phillipe Dauvin, chief economist at STMicroelectronics. The key drivers, according to the veteran forecaster, would be cellular phones, networking equipment, and set-top boxes. The worldwide communications chip business, he said, would grow nearly three times over the next five years--from $32 billion in 1999 to $85 billion by 2004, he said.

In fact, it was the total collapse of the market for communications chips that started the chip industry's nose dive in 2001.

Few market forecasters were pessimistic in their first-of-the-year forecasts. The SIA was claiming that chip sales were heading back down to their "normal" 17% growth. The industry was on track to make the SIA's latest forecast of $205 billion in global sales in 2000, according to the trade group, and it predicted the chip industry would grow 22% in 2001 to $249 billion.

Dataquest decided that any end-of-the year weakness was only short-term and that industry growth in 2001 would run in the low 20% range. "Historically, the industry has gone through inventory corrections during the positive portion of the industry cycle, and we see no reason to believe that this current weakening is anything else other than an inventory correction," said Joe D'Elia, Dataquest researcher.

But by February, in a dramatic turnaround, the SIA admitted the industry wouldn't reach its forecast of 22% sales growth in 2001 because of excess inventories at manufacturers and distributors.

The economy was being blamed for all of the deepening market problems. Motorola called it a "free fall into a recession." But one veteran observer said the dramatic fall taken by the chip industry could be over with fast. The current downturn looked like the 1984-85 chip slump to analyst Bill McClean of IC Insights. That downturn was one of the worst in terms of intensity, but it was over relatively fast, he noted.

McClean even predicted that sequential quarterly growth would return to the IC industry starting in the third quarter. And the SIA maintained that "current forecasts suggest the inventory adjustment will be completed by the end of the third quarter, and end-market product demand will improve later in the year."

By May, Dataquest was abandoning ship for 2001. It slashed its industry forecast by more than $100 billion from its original 2001 prediction in late 2000.

The plummeting chip market then started sparking consolidation talk. But this has been predicted for 30 years or more. The Top 10 chip makers would end up with 80-or-90% of the world market with startups all but gone. But that didn't happen in this year's tough market and it won't for the foreseeable future.

Three factors are making the semiconductor industry "more diverse, not less," said Cypress Semiconductor CEO T.J. Rodgers. Tremendous specialization is going on" he noted, "and no company can possess all the intellectual property to compete in all areas." Then there is the "advent of the fabless model, which eliminates the barrier-to-entry issue." Finally, he said, the chip industry "is taking over the systems business--not vice versa."

While IC Insights acknowledged in June that 2001 would go down in the record books as one of the worst ever for the IC business--with a 21% decline--the unprecedented rapid decline in the first quarter makes it even more likely that sequential growth would begin in the third quarter.

As late as June, the SIA was still bullish. It predicted that a second-half recovery will pull the chip industry out of its current downturn and spur a growth rate of 20.5% in 2002 and 25% in 2003. But by now, STMicro's Dauvin had turned bearish. "I think we will have to wait until the second half of 2002 to see a strong and long-lasting rebound," he said.

By the end of August, the veteran CEO of LSI Logic, Wilf Corrigan, pronounced the IC downturn as having hit bottom, but that the global chip business would fall "something north of minus 30% over 2000." But he spoiled it all by predicting that the worldwide IC industry in 2002 could grow by 20%.

By October, El Segundo market researcher iSuppli was looking for a "slow and jerky recovery" beginning in the final three months of this year. And 2002 wouldn't exactly rebound, it said, predicting that the electronics components market would rise "just" 6.2% in 2002 with revenues reaching $371 billion. While it figured most of the excess inventory had been worked off, the economic downturn was stalling the return of a strong, long-term rebound in the chip market.

And wonder of all wonders, the SIA as late as September still believed that sequential sales growth would begin again in the final three months of 2001. "Traditional holiday sales of personal computers, communications products, and a variety of hand held devices will accelerate year-end demand for a broad range of semiconductors," according to the trade group. Still not a clue as to what was happening.

Up until now, nearly everyone had been predicting a mild to strong recovery in 2002. Then Dan Niles of Lehman Bros. shocked everyone by predicting the worldwide chip business in 2002 would run "flat to 10% down" from this year's dismal results, which could be off as much as 35%. He even predicted that it would take chip makers and chip-equipment companies three years to rebound and fully recover from the current chip recession.

Despite the fact that fully one-third of the world's IC processing capacity was sitting idle in the third quarter, the chip industry was still adding new capacity to its production lines. Despite the plant closings and the huge cuts being made in capital spending this year, IC fab capacity nudged up by 0.7% in the third quarter.

Global wafer fabs were operating at a record low 64.2% capacity utilization in the third quarter, down from 73.1% in the second quarter and sharply below the year-ago figure of 96.4%. The increase in fab capacity at record-low utilization rates "is amazing and shows just how difficult it is to turn this ship around despite all of the cutbacks," comments IC Insights analyst McClean.

By October, the downturn was hurting even the best-of-run chip makers. "Global economic and political uncertainty have increased substantially in the past month," acknowledged STMicroelectronics CEO Pasquale Pistorio. The outlook for ST's revenues and gross margin in the fourth quarter of 2001, he said, was to run at the previous quarter's levels.

By fall, Dataquest acknowledged just how bad it was by predicting it would take a couple of years before boom times started up again in the semiconductor industry. But the market researcher still expects global chip sales to inch up 3% to $152 billion in 2002.

Just before Christmas, we heard from the industry's contrarian research firm. Advanced Forecasting, usually in the bear camp, had decided that the global chip business had hit bottom in October and started going up. But don't expect a fast rebound. The current downturn is much different than the last one in 1998 when the IC industry made a full and quick recovery, the firm said. "The economy is very weak right now," comments Advanced VP David Crume. "This will impact the strength and recovery of the industry in 2002."

Also convinced that a chip recovery was underway was Semico Research. In fact, the Phoenix market researcher believes that global semiconductor sales will jump by 20% in 2002. That qualifies Semico as the most bullish market research firm. Most forecasts for next year call for slight growth at best--on the order of 1%-to-6%. That would be coming after this year's big plunge of between 32% and 35%.

(Return to 2001 Top 10 list or go to No. 2).