Gartner Research and Moody's don't see meaningful recovery in semiconductor sector until well into '09

Research firm Gartner Inc. (IT) has reduced its 2008 and 2009 revenue growth forecast for the semiconductor industry and doesn't expect the sector to recover until the second half of next year.

"We''re at a crossroads," said Gartner Research Director John Barber during the firm's semiconductor roadshow in Singapore Sep 2. "We''re seeing weakness in the market we didn't see in the first half (of the year)."

He said that while the semiconductor industry performed relatively well in the first half of the year behind strong growth in personal computers and handsets, deteriorating global economic conditions are starting to diminish consumer buying power around the world.

Gartner now expects the semiconductor industry revenue to grow 4.2% from 2007 to US$285 billion, down from a previous forecast for 4.6% growth to US$287 billion. Revenue for 2009 is expected to grow 7.8% from 2008 to US$308 billion, down from 7.9% growth to US$309 billion forecast earlier.

"We are starting to see the strength of consumer demand for PC and handsets starting to weaken," Barber said, adding that the forecasts could be adjusted further should macroeconomic conditions continue to deteriorate.

Falling demand, rising margin pressures and increasing competitive pressures will also fuel further merger and acquisition activities, he said, as companies fight for a foothold in the market.

Barber also said a market recovery for dynamic random access memory, or DRAM, and NAND flash memory chips is unlikely until 2010 due to anticipated weakness in consumer demand and oversupply. He said demand for DRAM, widely used for PCs, will remain weak until the mass adoption of 64-bit operating systems that require more memory begins.

Adverse market conditions for NAND chips, used in digital cameras and MP3 players, are further compounded as major players like Samsung Electronics continue to add capacity to take further market share, Barber said.

"We''ve seen in the past some guys willing to lose money for market share," he said. "We could possibly see that again."

Gartner research vice president Philip Koh says global economic slowdown weakening consumer demand for PCs and handsets, hurting overall demand for semiconductors. "Even though computer makers plan to launch more low-cost netbooks, consumers will refrain from buying new PCs or replacing old ones, as their confidence in the economy is weak," says Koh.

He does not think demand for chips will pick up until 2H09 when global economy may turn around.

Moody's sets negative rating outlook for Asia Pacific's technology, semiconductor sectors over next 12-18 months.

"This outlook reflects mainly the pressures apparent on profitability due to the severer-than-normal downturn in prices for DRAM chips and NAND flash memory," says Moody''s analyst Ken Chan. "Profitability for the foundries as well as the outsourced semiconductor assembly and testing (OSAT) sectors is being undermined by lower average selling prices, foreign-exchange volatility, and higher costs for raw materials and utilities."

Moody''s says it doesn't see meaningful recovery until well into 2009. Notes Asian technology, semiconductor sectors have also yet to feel full impact of economic slowdown in US, Europe, Japan.