The Party's Not Over YetRobert D. Hof
It doesn't get much better than this. In their best performance since 1988, the world's chipmakers finished 1993 with a 29% jump in sales, to $77 billion. U.S. companies grew 35%, earning nearly every producer record profits--and increasing the market lead in total chip sales America grabbed back from Japan in 1992. So why do chipmakers seem a bit jittery going into 1994?
Because, like revelers at a New Year's Eve party, they figure this much fun can't last forever in their treacherous, fast-paced markets. They do have a few things to worry about: The monthly book-to-bill ratio, which compares new orders with current shipments, has declined slightly since July. Some chipmakers report slowing orders on commodity products such as microcontrollers, used in a wide variety of products. Sales of personal computers, the driver for much of the industry's growth, may be braking a bit, and defense-industry purchases are down. The Semiconductor Industry Assn. forecasts that worldwide and U.S. growth in chip sales will slow to 14% this year. "People are nervous," says Craig R. Barrett, chief operating officer of Intel Corp. The bottom line, though, is that chip earnings are holding up for now--and 14% is 14%. So, adds Barrett, "things still feel good."
DRAM JAM. Indeed, large segments of the market should do very well. Even if PC revenue growth slows, unit sales should be much higher. That's what matters for chipmakers. Sales of the microprocessors used to power IBM-style PCs helped Intel grow an expected 50% in 1993, to $8.8 billion--padding its lead as the world's No.1 producer. Analysts say it may sell 6 million next-generation Pentium chips in 1994, up from 400,000 in 1993.
The older 486 will remain the star, though. Analysts expect 44 million to be shipped this year, up 40% from 1993. Intel, its creator, won't hog the profits: Barring setbacks in court, 486 clones from Advanced Micro Devices Inc. and Cyrix Corp. will make their first major inroads. And fast RISC (reduced instruction-set computing) microprocessors, such as the PowerPC from a Motorola-IBM-Apple joint venture, could nibble at Intel's near-monopoly in PCs, with sales of perhaps 1 million in 1994. In short, analysts say competition may help trim Intel's plump 63% gross profit margin to 59% in 1994, even as world microprocessor sales climb 34%, to $11.6 billion.
The good times will also roll for memory chips--especially the ubiquitous DRAMs (dynamic random-access memories), whose sales may grow 19% in 1994, to $15.7 billion. Pentium PCs with memory-hogging Windows programs will use up to four times as much memory as today's machines. Japanese chipmakers own most of the market--and robust DRAM sales saved them from major retrenchment in 1993, when consumer- electronics sales nosedived. The few U.S. memory makers will benefit, too. Analysts expect sales at Micron Technology Inc. in Boise to grow more than 60% for the second year in a row--to $1.3 billion for the year ending in August. That may happen even though competition from Korean companies such as Samsung Group may flatten prices.
Another hot area will be flash memory chips. Because they retain data even when the power is turned off, they're popular for portable products such as notebook PCs. Sales will double again this year, to $1.2 billion, predicts market researcher Integrated Circuit Engineering Corp. Intel and Advanced Micro Devices dominate, but the battle will grow as major Japanese companies such as Toshiba and NEC jump in.
Changes in the PC industry will create new opportunities as well. Fancy graphics, video, and sound require multimedia chips from the likes of Cirrus Logic Inc. Analysts say its sales may grow 21%, to $430 million, in the fiscal year that ends in March. Computer networking and new wireless services for personal digital assistants, such as Apple's Newton, will drive demand for communications chips--good news for Motorola, Zilog, and National Semiconductor.
SMOOTHER RIDE? Overall, "the biggest challenge will be just keeping up with the business," says G. Dan Hutcheson, president of San Jose market researcher VLSI Research Inc. Chipmakers are expected to spend $18.4 billion on new plants this year, up 27% from 1993. So the $11.9 billion chipmaking-equipment industry could grow 29% in 1994. Hutcheson says U.S. chipmakers will outspend the Japanese again--$9.8 billion to $3.6 billion.
Even if growth slows, profits aren't expected to plunge. Chipmakers have so far resisted overexpansion and have kept staffs and inventories lean. Some analysts even suggest that for U.S. chipmakers, at least, the industry's notorious boom-and-bust cycles are evening out. Maybe, maybe not. But this year, at least, chipmakers will party on.
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