At the Semiconductor Industry Association's annual fall meeting, the ebullient mood was in stark contrast to what some attendees described as the funeral-like atmosphere of the last few years. The numbers said it all: Demand for chips in every major market will be up in 2004, so much that the industry group is predicting that sales will rise by impressive 19.4 percent to $194.6 billion.

"For 2004, we're looking at a year in where the external environment is positive. When we look back at it, we will think of it as an excellent vintage for the semiconductor industry," John Daane, president and chief executive officer of Altera Corp., who presented this year's SIA fall forecast.

The SIA had been predicting a strong comeback since the beginning of the year, but was compelled to moderate its original forecast as the war in Iraq and the spread of SARS created a sense of uncertainty. Growth in chip demand then picked up quickly in the second half of the year, especially in the third quarter. That has prompted the SIA to again revise its 2003 growth forecast to 15.8 percent, boosting total chip sales to $163 billion.

One of the bright spots is demand for PCs, which is still the largest market for chips even though it is becoming less important than before. PC sales are expected to increase 8 percent this year and then 11 percent next year as companies upgrade to new systems. Chip vendors also expect cellphone makers will add more semiconductor content to offer new features like color displays. Meanwhile, consumer electronics manufacturers are ordering more chips to keep up with rising demand for recordable DVD players and digital cameras.

The one wild card, as usual, is sales of memory chips. Sales of DRAM devices are on track to grow by more than 30 percent next year as demand for PCs and servers rises, and then drop by 10 percent the following year as memory vendors bring up more capacity. Still during that time sales of non-memory chips should keep growing more than 10 percent annually, according to the SIA.

Another favorable development for chip makers is the tightest manufacturing capacity since the peak of the last boom cycle. By the end of this year, total fab utilization should come in at more than 90 percent, which should give chip makers more confidence to raise prices. That would have been unimaginable two years ago when capacity utilization stood at just over 60 percent.

Daane said spending on new capacity is still less than where it needs to be to maintain equilibrium. "We're spending 18 percent of revenues in 2003 when we need to be spending 22 to 23 percent," he said.