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A Sunnier Scenario for Chips

By Otis Port Malcolm G. Penn says he still has nightmares about his contrarian, bullish forecast for the semiconductor industry in 2003. But that's not stopping him from going out on a limb again and thumbing his nose at the dour outlooks for next year from other prognosticators, including even the Semiconductor Industry Assn. Penn takes heart in his track record: For the last couple of years, his forecasts have been closer to the mark than perhaps any rival market researcher's.

Penn is founder and chairman of Future Horizons, a British market watcher based in Sevenoaks, south of London. Chip-industry folks in Europe regard Penn's outfit as their backyard Dataquest Inc. -- in part because Penn was the chap who set up the renowned U.S. tech market researcher's European operation in 1982 and headed it until starting Future Horizons in 1989.

The outlook for 2005 seems almost a replay of what happened going into 2003. Penn's initial take on 2003 called for 18% growth. Other projections were only in the single-digit range -- and by late spring, most were being lowered slightly.

"INVENTORY CORRECTION"? Then came time for the annual gathering that Future Horizons hosts each May. Penn fretted about his numbers. But no matter how he tweaked his computer models, he kept coming back to his original assessment. So he told the May meeting that he was sticking with 18%.

The outcome? Growth in 2003 tallied 18.8%. It was a similar story last January. Penn pegged 2004's semiconductor growth at 30%. Other forecasts then were in the low 20s. The final number isn't yet known but probably will be around 29%. And now for 2005, Penn foresees a 15% rise in worldwide chip sales, to $245 billion -- far from the flat or slightly down projections of other seers (see BW, 1/10/05, "The New Driver in Chipland").

"Nothing's guaranteed in the forecasting business," he admits, "but our prognosis is based on the fact that the current slowdown is an inventory correction, which means sales fall below real usage whilst parts in stock are being used up." Real demand for chips, he adds, "is thus currently much higher than actual shipments."

HANDSET "DISASTER." This inventory correction will be over soon, Penn says. Then he expects the mood to change quickly. "Our bet is that all of the other researchers will be cranking their forecasts back up in the second quarter," he says.

One market buoying sales this year will be personal computers. Penn expects a minimum 10% boost in PC unit shipments, largely due to purchases by businesses, many of which are now saddled with five-year-old machines. On the other hand, he terms the 2005 market for mobile-phone handsets "a disaster." Blame that on China's massive overbuilding of phones in 2004.

Still, with the ever-increasing silicon content in almost every consumer product that plugs into the wall or runs on batteries, plus a consensus among economists that global growth in 2005 will be around 4%, or significantly healthier than the 3.4% long-term average, Penn says "industry fundamentals are as positive as ever." Indeed, 15% growth would be close to the chip industry's historical performance -- and a couple percentage points better than its average annual growth record since 1978.

The world's chipmakers will no doubt be praying that Penn is on the money again. Port is a senior writer for BusinessWeek in New York

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