Gartner warns of 2008 semi industry downturn

By Suzanne Deffree, News Editor -- Electronic News, 11/14/2007

Gartner has warned that a downturn could be coming in 2008 for the semiconductor industry.

In a Gartner newsletter dated November 12, the firm noted government economists and financial counselors are now warning that the United States could experience a recession due to sub-prime mortgage debt and the U.S.-initiated, and now global, "credit crunch.”

Based on that, Klaus Rinnen, a managing VP at Gartner, wrote: “We believe the semiconductor industry would fall into a demand-driven downturn in 2008. The ramifications of this event would be milder compared with 2001, but much dependent on the segment in the supply chain, with the downside risk lower for semiconductor companies, given a slow 2007, but higher for capital equipment companies, given the rather substantial memory related capacity investments in 2007.”

Rinnen continued to state that the downturn in demand would likely extend into 2009, but would be very much dependent on the depth of the collateral impact on other economies around the globe, as well as the severity and speed of recovery in the U.S.

The analyst also stressed that the firm’s forecasts continue to assume there will not be a U.S. recession. “At the same time, while Gartner believes a recession is unlikely and would have minimal impact on the semiconductor device market, the probability of such an event has become more significant (a 30% probability based on Global Insight), which is why we recommend that our customers prepare backup plans just in case a recession occurs.

“If a recession were to hit the U.S. in 2008, the semiconductor industry could experience a demand-driven downcycle, which would likely extend into 2009. The severity of this cycle could depend on the depth and speed of a U.S. recovery, as well as the extent of collateral damage, if any, to other economies around the globe. For 2008, semiconductor equipment companies are most at risk during a recession scenario, while chip companies would be far less impacted.”

According to Rinnen, equipment companies' revenue in a mild recession could drop as much as 15% to 20% in 2008, while chip company revenue may decline in the mid-single-digit range.

“The rising probability for a U.S. recession raises the downside risk to the industry,” he said.

Rinnen made his statements based on a recent report, "Dataquest Insight: Semiconductor Industry Should Make Contingency Plans for a Potential U.S. Recession in 2008."

In a somewhat conflicting view, the SIA today reported global chip sales will grow at a 7.7% compound annual growth rate from 2007 to 2010 to reach $321 billion.