For Asian hardware and software companies, 2002 has been a year of adjustment as they accustom themselves to the continuing U.S. slowdown while looking forward to a rebound in the second half.

As Taiwan's chip set makers gird for a third quarter they expect will be slightly weaker than in past years, India's software community is looking to establish beachheads in Europe and Japan to compensate for slower demand from the United States. The South Korean industry is perhaps the most optimistic in the region. The Electronic Industries Association of Korea is predicting a second-half recovery, thanks to growing exports of PCs and semiconductors, an expanding Chinese market and emerging digital products.

Hobbled by the U.S. downturn, India's software-exports business has learned to look elsewhere for new markets and business lines. Vendors are seeking market opportunities in Europe and South America and are trying harder to pry open the Japanese market. Japan has always been seen as a potentially large customer, but the fact that U.S. companies were easier to do business with caused Indian software vendors to all but ignore Japan.

Software-export firms are also targeting new lines of business, such as business process outsourcing, a back-end job that needs fewer engineering skills than the traditional writing of code. Few Indian companies wanted to enter these lines. That they are doing so now through subsidiary companies indicates that their software business is not growing at the pace it did in the 1990s.

There are, however, hints that the worst may be over. Industry association Nasscom has predicted a recovery by year's end. Indian software companies have grown accustomed to slower growth and more-modest profits. Any expectations of a windfall as U.S. customers turn to software outsourcing as a costcutting measure have faded..

India's handful of hardware vendors, meanwhile, have seen growth shrink this year but have high hopes for 2003. The sector anticipates an estimated 8 percent growth rate in 2002, from 18 percent last year, while market researcher IDC is forecasting 29 percent growth in the Indian PC market next year. Indian PC companies still hold more than half the Indian market, despite estimates that overseas companies would dominate.

Taiwanese companies are accustomed to better second-half than first-half performance, but this year is expected to be an exception. Macronix International Co., a major flash memory maker, recently lowered its revenue projections by nearly $180 million, citing lower flash memory prices during the first half. However, the company said it still believes revenue will improve in the second half.

With PC demand slow, chip set maker Via Technologies reported a 28-month-record low, with revenue totaling about $46 million for June. Another chip set player, Silicon Integrated System, posted revenue of about $30 million, its lowest monthly sales figure for the year. Both companies expect a better third quarter. Via president Chen Wen-Chi has moved to diversify the company's product offerings by lowering its sales ratio of chip sets to less than 50 percent. The company has put resources into the development of graphics, networking and wireless chips.

Unlike Taiwan's component makers, systems manufacturers are more upbeat. For example, Compal Electronics, one of the top five notebook PC makers, posted record revenue of $850 million in the second quarter. Most forecasts suggest business will continue to be below normal but point to signs of improvement later in the year.

South Korea's economy is expected to recover this year, with GDP rising by 6.2 percent. Likewise, the electronics industry is looking forward to recovery in the second half, though executives are keeping a wary eye on the U.S. economy, international oil prices and volatile exchange rates.

Korea's market share for ICs, computers and consumer electronics is declining with the arrival of new challengers. Its IC and telecom equipment makers might be able to maintain competitiveness by focusing more on consumer electronics and PCs, according to the Korea Development Bank.

Despite uncertainty about an economic recovery, overall prospects for semiconductors are bright this year as local companies enter the Chinese market and as sales of mobile phones rise. Inventory adjustments should be completed in time for a second-half boost, observers said.

Drivers in the IC market include thin-film transistor LCDs and cellular handsets. Demand for semiconductors is expected to rise by the fourth quarter as wireless phones, PDAs and PCs begin an uptick. Also expected to perform well in the third quarter are semiconductor equipment, digital broadcasting equipment and electronics components. With PC demand expected to increase, DRAM prices are also predicted to rise again starting in the third quarter.

Industry observers think Taiwan might exceed South Korea in total production and sales volume thanks to its aggressive investment in foundries. "Investment by Taiwan and China is focused on foundries," said Kim, Soo-Kyoum Sr., a semiconductor analyst with IDC. "It's not clear whether they are ultimately going to aim at [being integrated device manufacturers] or not."

Another challenge for Korea is the future of Hynix Semiconductor Inc. That company's ability to secure investment capital will be the key to its survival, observers said, but even if investment is delayed, Hynix may be able to avoid bankruptcy thanks to the growing DRAM market.

Meanwhile, industry watchers believe that the introduction of cdma2000-1x EV-DO phones later this year could help boost market growth for the telecommunication equipment and handset markets, which have been struggling because of reduced purchases by service providers. Fierce competition is expected in broadband Internet access as the market for new subscribers shrinks during the second half. Providers are expected to offer quick migration from current asymmetric digital subscriber lines to very high-bit-rate DSL.

The wireless LAN market is expected to recover this summer as major companies like Korea Telecom and Hanaro Telecom increase equipment purchases. Growth in corporate WLANs is forecast to be brisk.

MIke Pan is Bureau Chief for sister publication EE Times-Taiwan; Park Dong-Wook is Senior Technical Editor of EE Times-Korea.