"Long-term compound annual growth rates have declined from 15 to 10 percent and now we are looking at five percent," said Bryan Lewis, a vice president of research at Gartner.

In its latest chip forecast, Gartner revised its 2007 semiconductor forecast from 6.4 down to just 2.5 percent growth this year. The market watcher estimates compound growth in semiconductors over the next five years at 5.1 percent. The good news is the steepness of semiconductor up and down cycles are moderating, thanks to a market less dependent on memory and more controlled about inventories.

In this environment, "price pressures are everywhere and they will only get worse," Lewis said. "We have entered a slower growth era and you have to adjust your strategies," he said.

"Overall there will be more consolidation and some outright market exists," due to the continued slowdown in semiconductors, said Lewis.

Companies are working a variety of strategies ranging from mergers such as the combination of LSI Logic and Agere Systems to private equity deals struck by Freescale and NXP. However, Lewis poured cold water on rumors that private equity firms would buy up and combine Cadence Design Systems and Mentor Graphics.

"That would be biting off much more than anyone could handle," he said.

Partnerships between systems makers and foundries that cut out chip makers as middlemen is one of the more interesting strategies emerging in this climate, Lewis said.

Lewis pointed to the example of Microsoft which licensed for its Xbox 360 a graphics design from the former ATI Technologies and had it made at TSMC. The company considered a similar move for its Xbox 360 processor designed by IBM, but at the last minute decided to have IBM assume overall responsibility for making, packaging and testing the chip rather than buying raw wafers from Chartered Semiconductor.

Nevertheless, Lewis praised the partnership IBM has struck with Chartered and Samsung to share marketing as well as development of process technology and libraries. The trio recently snatched some of Qualcomm foundry business from TSMC, he noted.

Cisco Systems has had mixed experience trying a similar approach of taking some of its chip designs directly to foundries. In addition, some of China's system makers are trying this tactic for chips they reverse engineer for sale in China and make in China foundries, avoiding intellectual property royalties, Lewis said.