Semiconductor industry can expect 'long, dark season' for OEMs, Gartner reports

Garter said it expects the greatest impact will be on high-end consumer electronics, such as laptops, LCD TVs, media players, and portable navigation devices.

By Suzanne Deffree, Managing Editor, News -- Electronic News, 10/27/2008

The coming holiday season will be less than jolly for many members of the electronics supply chain.

Bucking the usual trends, several OEMs have stated decisions not to increase production of electronic equipment for the holiday season, in anticipation of weaker demand from consumers as the global economic crisis continues. Gartner reminded in a report this morning such action causes "extreme variations in the electronic systems supply chain" -- from ODMs and EMS companies, to chip packaging and chip foundry companies -- and said that the result will be reduced Q4 orders for chip vendors.

"Because of the manufacturing lead times, wafer manufacturers have only recently reduced wafer builds significantly. As a result, many wafers manufactured in Q3 will sit as inventory in Q4. Moreover, wafer infusion starts in Q4 and Q1 2009 will be significantly reduced because fabs will be stuck with inventory manufactured before the financial crash. The speed and intensity of these knock-on effects suggest that the supply chain is planning for reduced demand well into Q1 2009," Gartner Analysts Andrew Phillips (pictured, left) and Jim Walker wrote in the research company's Semiconductor DQ Monday Report.

Indeed, terms like "poor visibility," "cloudy outlook," and "softening demand" have come up on many semiconductor companies September quarter financial result calls in the last two weeks, including those of bellwethers like Intel and Texas Instruments. Gartner said that suggests companies remain unsure of where the world economic situation is heading and what its full effect on the semiconductor industry will be.

"Gartner's anecdotal evidence from the Asia/Pacific region and Japan supports the trend for a weak Q4 in the semiconductor supply chain, as they account for two-thirds of semiconductor sales worldwide," Phillips and Walker said in the report.

Garter said it expects the greatest impact will be on high-end consumer electronics, such as laptops, LCD TVs, media players, and portable navigation devices. The impact on 3G mobile phones should be less, the research company said, because demand is often determined by contract renewals with operators, in which a handset upgrade is obligatory.

"Broad evidence shows that weak demand is widespread and has backed up throughout the semiconductor supply chain to foundry chip manufacturers and chip packaging and electronic equipment outsourcing companies," the analysts wrote.

Backing that point, Phillips and Walker (pictured, right) reminded that market consensus among chip ODMs manufacturing netbook PCs shows that 2008 demand could be lower by up to 20%.

The duo also pointed out that Linear Technology, which has significant semiconductor distribution revenue, recently said it anticipates a sequential decline of up to 20% and that major audio codec supplier Wolfson Microelectronics said it anticipates Q4 revenue to fall 24% from Q3 revenue.

Further, top foundry TSMC has stated that it expects Q4 shipments to fall up to 24% from Q3 results and already has utilization rates below 75%. However, Gartner said that utilization rates for chip manufacturers overall are likely to be about 85%.

According to the research company's data, wafer shipments declined about 2% quarter over quarter in Q3 and the sequential decline will be significantly greater in Q4 and Q1 2009.

Gartner also noted that at the Guangzhou (China) Export Trade Fair earlier this month there were 30% fewer European and North American visitors than at the spring event, and they did not place orders. The majority of orders placed at the event were from Brazilian and Russian attendees, according to the company.

Gartner said it will be issuing updated forecasts soon to reflect changing market conditions.