But we are now far enough into the downturn to see that from the perspective of both electronic equipment makers and semiconductor suppliers, it doesn't get much worse than this. And Europe is coming to its downturn six months after the United States, where the dot-com bubble burst in the fourth quarter of 2000, suggesting that much of Europe's pain is yet to come.

Malcolm Penn, chairman and chief executive officer of market consultancy Future Horizons (Sevenoaks, England), blames a couple of factors. "First, the slowed U.S. economy has ricocheted throughout the world, reducing demand for electronics goods everywhere," he said. "As with inventory, this problem too eventually sorts itself out, it just takes a lot longer [than simple inventory problems].

"The second problem is much more severe in that it is structural, and these problems take a while to get sorted. The two single biggest IC markets, the PC and mobile phone, have fallen afoul of the business ramifications of Moore's Law-you either give more bang for the buck, or you get fewer bucks for the bang. And if you ever can't give more bang for the buck, you're heading for very serious trouble," he said.

And Europe has its own special circumstances, which will modulate prospects here. These include the introduction of the Euro currency coins and notes across 12 of the European Union's 15 countries on Jan. 1 and the introduction of 2.5G and 3G phone services, which will be prefigured in the next six months.

Threat of 'stagflation'

Penn said the European Union is more interested in economic and federal experimentation than in the economic and liberalization reform to which it pays lip service. "As a result, the 12-nation euroland economies are now facing the threat of stagflation-rising inflation and falling GDP. The euro 'one size fits all' economic 'experiment' remains dogged by the dilemma of a German economy that needs a dose of the falling-interest-rate medicine, whilst others, notably Ireland, need exactly the opposite." With a near 30 percent collapse in the value against the U.S. dollar since the euro's launch on Jan. 1, 1999, increased import prices are inevitably pushing up costs, especially the cost of dollar-denominated oil, thereby further weakening the euro. The combination of a weak euro, higher world oil prices and a global slowdown is not a pretty euroland prospect.

"It is Europe's politicians who bear the responsibility for the region's long-term health, which means tackling pension and welfare reforms, red tape and labor market deregulation, and taxation," Penn said. "Unfortunately, with elections in France in spring 2002 and in Germany in fall 2002, the eurozone's two biggest economies, there is no stomach for attacking these much-needed reforms until the latter part of next year at the earliest, if at all."

But even though the electronics downturn could coincide with a global recession and is likely to be U- rather than V-shaped, it is certain the market will return. The question is in what manner.

The auction for third-generation (3G) mobile phone licenses across Europe did much to suck liquidity out of the European stock markets. But as companies start to roll out infrastructure, which has already started, it will start to drive the market. Similarly, the mobile phone handset market is stalled this year but is likely to come back stronger than ever in 2002.

"Over the next year 3G will be limited very much to Japan. Any 3G rollout in Europe is prototyping. In Japan they are going straight to 3G," said Alan Brown, senior industry analyst with Gartner Dataquest.

Brown said one key question has yet to be answered; How will the 3G service be used?

"For all the talk of exotic video applications, e-mail will be more significant. And the rollout of wireless LAN will affect take-up [of 3G] in some areas."

Brown continued: "All the signs are that 3G will be well-accepted in Japan. But in Europe it's likely to be a slower and more evolutionary approach. First we have to go through the 2.5G moves within the GSM standard to GPRS [General Packet Radio Service] and Edge [Enhanced Data-rate for GSM Evolution]. It's a case of building up services so that data revenue can build up."

In other words, the complexity of the situation in Europe-with three carrier frequencies at 900, 1,800 and 2,000-MHz and the need to support 2.5G protocols alongside wideband-CDMA, the regionally adopted 3G standard-could inhibit the adoption of 3G.

"There is a risk the consumer could get confused. The consumer doesn't care about the technology but does care about the service and how easy it is to use," said Brown.

According to Dataquest, European communications semiconductor consumption grew at a 32 percent annual growth rate to reach just over $15.3 billion in 2000. In Europe this segment is dominated by cellular handsets and associated infrastructure. However, during the fourth quarter of 2000 the supply of cellular handsets exceeded supply for the first time. Brown estimates that about 50 million handsets were left in the distribution channel at the end of last year. The result in 2001 is likely to be the first ever year-on-year decline in cell phone shipments.

Brown said that once the inventory is cleared and GPRS handsets begin shipping during the fourth quarter of 2001 more moderate growth will return. Other important areas that are likely to recover in the fourth quarter include equipment for wired line broadband access such as ADSL, cable and ISDN modems.

And Brown does see opportunities outside Europe arriving in 2002 or soon after.

"Once you get to about 50 percent penetration in any geographic market it very quickly goes to 70 percent. The U.S. and southeast Asia have still to go through this sales burst. And together with GSM modules in the car, in laptops and for telemetry applications, semiconductor vendors will see increased opportunities," said Brown.

In 2G terminals Texas Instruments has developed a leading position as an ASIC supplier being a major supplier to Nokia, which in turn has cornered 40 percent of the digital handset market. The ASIC approach has its attractions because it allows Nokia to include its own intellectual property along with powerful DSP cores from Texas Instruments and an ARM 32-bit processor core.

But meanwhile Intel is building chip sets for 3G terminals around its XScale processor, which itself is based on an ARM architectural license. It has already signed up Mitsubishi and is likely to sign up many more companies.

"The chip set is the way forward. The tendency within both GSM and CDMA is to modularize the handset; to make the RF integration easy, to make baseband modules plug together and provide programmability through software."

"There is a tremendous threat from Intel to Texas Instruments," said Brown.

The advantage is reduced engineering cost and time-to-market. The disadvantage, at least from Nokia's point of view, is giving up control of the handset architecture to a chip set supplier. The lessons of the PC market which Intel came to dominate will not have been lost on Nokia.

"Intel is putting a lot of money into it, and is technically astute. But mobile communications needs the compute element and the DSP element. Intel and Analog Devices are developing a DSP between them. If that proves a good combination then they are on their way. But TI is the incumbent."

"Nokia and Ericsson are still going the ASIC route. It protects their intellectual property. But the chip set can be more efficient and lowers the barriers to entry. It means any good consumer electronics company could come in. The dynamics will be very interesting," said Brown.

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