2008, 2009 will be industry's first back-to-back years of declining sales, Gartner says

Sales could fall nearly 25% next year, but are expected to bounce back in 2010 and 2011, with worldwide semiconductor revenue climbing 14.6% and 9.4% respectively.

By Suzanne Deffree, Managing Editor, News -- Electronic News, 12/16/2008

It's a first, but not one to be celebrated.

Gartner Inc this morning reported that for the first time in the semiconductor industry's history, 2008 and 2009 will show back-to-back revenue declines.

The report follows on estimates from Gartner made late last week that 2008 would show a 4.4% decline in semiconductor revenue for sales of $261.9 billion. At the time Gartner said that "the worst was yet to come,"  but did not share projections for 2009.

Today Gartner said it expects semiconductor sales in Q4 to show a record quarter-on-quarter decline of 24.4%, surpassing the 20% decline record set in Q2 2001. With the declines continuing into next year, the market research company estimated 2009 will show a 16.3% decline from 2008 revenue, with semiconductor sales forecast to total $219.2 billion.

Just last month, the company was positive on 2008 and 2009, projecting growth for this year and a 2.2% decline for next year.

“While many executives may try to compare this downturn to the 2001 tech bubble, this downturn is different in many ways,” said Bryan Lewis, research VP at Gartner, in a statement. “This downturn is broad-based, not limited to only technology, has a much different growth profile before the downturn, and has far less inventory buildup. Inventory levels this time have been monitored and more tightly controlled throughout the entire food chain, and this will help the market come back more quickly than in 2001.”

Gartner reminded that in 2001 the semiconductor industry experienced its worst revenue downturn in history, with sales declining 32.5% from the previous year. However, that was following two strong revenue growth years in 1999 and 2000 when revenue grew 22% and 34%, respectively.

Gartner analysts said the wildcard for the semiconductor industry in 2009 is DRAM. The DRAM industry has been in a downturn for 18 months and losses are now approaching $12 billion, according to the company's data.

“The DRAM market is so bad that suppliers must either significantly scale back supply, or the weaker players will be forced into mergers or bankruptcy. Either way, we are expecting DRAM pricing to firm during the second half of 2009, and this has the potential to moderate the decline in 2009 semiconductor revenue," said Andrew Norwood, research VP at Gartner, in the statement.

IC Insights Monday reported that reduced capital spending and production in the DRAM market can be expected in 2009 and that a price surge for the memory should come in 2010. However, the research company is skeptical on how long the DRAM market "recovery" will last the next time around, considering DRAM's volatile market history.

Gartner's Norwood continued to state that "only widespread government support for the ailing DRAM vendors could avert this supply rationalization, and that would be a disaster for the industry as it would just prolong the current downturn.”

Gartner noted the continuing uncertainty in the total semiconductor market and said that in the negative scenario the semiconductor industry could decline 24.7% next year.

“However, with such a steep decline in the fourth quarter of 2008, it is possible that some companies have over-corrected to be on the safe side by keeping inventory levels at the absolute minimum,” Lewis said. “This leaves the door open for semiconductor sales in the first quarter of 2009 to be somewhat better than seasonally expected as some inventories will need to be replenished.”

Gartner said it expects the semiconductor industry to bounce back in 2010 and 2011, with worldwide semiconductor revenue reaching $251.2 billion in 2010, a 14.6% increase from 2009, and in 2011 revenue reaching $274.9 billion, a 9.4% increase from the previous year.