Chipmakers on the Edge

HONG KONG—Overcapacity. Looming bankruptcies. Government bailouts. The U.S. automobile industry? No, this is the global semiconductor industry, producers of the chips that power everything in today's economy from cell phones to smart infrastructure. While so much attention has been focused on American automakers, the convulsions in the chips business may have just as broad implications and possibly more strategic significance for countries around the world.

In recent years, Intel (INTC), Samsung, and many lesser-known companies have pumped huge amounts of money into new production facilities. They saw rich opportunities in making chips for the growing crop of digital devices, from iPhones and BlackBerrys to electric utility monitoring systems. But now as the worldwide economy slows, demand for those chips has fallen off a cliff. Companies that sank billions into new factories are running them at half capacity or less, and losing a bundle. The situation is "desperate," says Daniel Heyler, head of global semiconductor research for Merrill Lynch (MER) in Hong Kong.