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JULY 5, 1999 ARTICLE FOR EETIMES


Electronic Engineering Times, © 1999, CMP
Media Inc.

July 5, 1999


Global GDP Pickup Buoys Chips

By
Bill McClean


Preface

The
following article originally appeared in the July
5, 1999 issue of Electronic Engineering Times. It
should be noted that there are two additional
charts in this on-line version that were not
presented in the EETimes article. Moreover, some of
the GDP figures have been updated to represent the
most current forecasts now available. Please call
480-348-1133 if you have any questions on this
article or about IC market research products
available from IC Insights.


Worldwide Economic Conditions

Worldwide
economic conditions create a positive or negative
environment for the semiconductor industry.
Although the historical correlation between
worldwide gross domestic product (GDP) growth and
semiconductor industry growth has been moderate, IC
Insights believes that in 1999 the correlation will
be relatively strong (see figure below).



In
general, worldwide economic news has been upbeat.
While the U.S. economy continues to move strongly
forward through 1999, some other regions are also
displaying better than expected results. That is
especially true of the Asia-Pacific region (not
including Japan). For example, South Korea was
initially forecast to show no growth in GDP in
1999. However, the latest forecast for the 1999
South Korean GDP is for an increase of 4.8 percent.

Concerning
GDP growth, the one disappointing region thus far
in 1999 has been Europe. Initially forecast to show
a 2.1 percent 1999 GDP growth rate, the forecast
has now been cut to 2.0 percent (down from 2.7
percent registered in 1998). Still, the beginnings
of an Asia-Pacific recovery and the continued surge
in the U.S. economy have served to somewhat offset
this unexpected weakness in Europe. Thus, the
worldwide GDP outlook for 1999 has been boosted
slightly to 2.6 percent from our early 1999
expectations of 2.3 percent.


Electronic System Sales

Another
factor affecting the semiconductor industry is
electronic-system sales. In 1999’s first quarter,
PC unit shipments surged 17 percent. Throughout the
first half of 1999, the market for
telecommunications equipment was also very strong.
A steep drop in system sales in the second half of
1999 is not expected. In general, it appears that
worldwide electronic-system sales, especially
telecom equipment (e.g., cellular phones), will
have a positive effect on the 1999 semiconductor
market.

Currently,
the computer market is still the primary driving
force in the IC industry. However, the telecom IC
market is forecast to gain six percentage points of
market share from 1993 through 1999 (see figure
below). The telecom-equipment IC market is also
expected to display the fastest growth of all the
electronic-system segments over the next few years,
gaining three more points of market share from 1999
through 2003. IC Insights forecasts that in 2003,
the computer and telecom segments will increase
their combined share of the total IC market to 79
percent. Thus, while hot new consumer, industrial,
and automotive IC applications will always be
emerging, the future health of the overall IC
industry is expected to be increasingly dependent
upon the strength of both computer- and
telecom-system sales.



A big
unknown for electronic-system sales in the second
half of 1999 is the impact of the Y2K situation.
Some surveys conducted in the early part of 1999
reported the possibility of a corporate lock down
on computer purchases beginning in late 1999. That
potential cutback in business-computer spending is
said to be due to the reluctance of companies to
add new computer hardware so close to January 1,
2000.

Some
have attempted to predict the effects of Y2K on
1999-2000 corporate computer sales by gathering
information from company surveys. However, most
surveys conducted in the first half of 1999 polled
only U.S. companies, with worldwide effects
remaining cloudy. Uncertainty continues to exist
over the impact of Y2K issues on worldwide consumer
PC, industrial systems, automotive-electronics, and
cellular-phone sales.

Another
potentially important issue regarding Y2K and the
semiconductor industry is inventories.
Electronic-system houses may begin building
semiconductor inventory in late 1999 (most likely
after September) in an attempt to minimize any
disruption in component supply in early 2000.
Overall, there continue to be many more questions
than answers concerning the Y2K impact. It should
be noted that because there appear to be as many
possible negative as positive effects of Y2K on the
semiconductor industry, IC Insights’ 1999 forecast
is Y2K-neutral (see figure below).




Semiconductor Industry Forecast

Through
the first half of 1999, worldwide economic and
electronic-system sales effects on the
semiconductor industry have generally been
positive. That influence was mirrored in the early
1999 results for the semiconductor industry. The
figure below shows the actual 1998 and 1Q99
quarterly semiconductor market results and IC
Insights’ quarterly estimates and forecasts for the
remainder of 1999.



It
should be noted that pricing trends are still a key
issue in the IC industry. This is especially true
for DRAM and 32-bit microprocessor IC product
segments. While DRAMs and MPUs have led the way in
the current recovery, they are also the two product
segments that are causing the most concern (based
on highly competitive pricing) heading into the
second half of 1999. For these two segments, IC
Insights considered the second quarter of 1999 to
be the ” marketshare quarter .”

In the
DRAM market, Micron, Samsung, and Hyundai/LG are
each on a mission to become the largest producer in
the world. This 3-way battle served to bludgeon 64M
DRAM ASPs from over $9.00 in February to just over
$7.00 in May. In the MPU market, Intel and AMD are
slugging it out for the low-end PC market (while
National/Cyrix dropped out) by slashing 32-bit MPU
price tags. Both of these situations have one thing
in common — the willingness of the companies
involved to sacrifice short-term results for
potential future (2H99 and 2000) rewards.

IC
Insights believes that the worst of the DRAM and
MPU competitive pricing battles will be over after
2Q99. A stable IC pricing environment is a key
assumption in the forecast for an increasingly
stronger semiconductor market in the second half of
1999. In summary, IC Insights’ worldwide
semiconductor industry forecast calls for a
“healing” year in 1999 leading to strong growth in
2000.


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