Feature: Caution remains about IT recovery

By SONIA KOLESNIKOV-JESSOP, UPI Business Correspondent

SINGAPORE, Aug. 26 (UPI) -- In the last few weeks the clouds that shrouded the semiconductor industry's outlook may have lifted, but there are still plenty of uncertainties remaining, making it hard to forecast the strength of the rebound.

"Sentiment has shifted from one of uncertainties to one of healthy skepticism," said Richard Gordon, research vice president for Gartner's semiconductor research group.


Gordon estimates that revenues for the industry will increase by 11.2 percent this year to $173 billion. "It's not too bad and can be considered as a modest growth. On good years, the industry could expect 20 percent growth," he noted. Gordon recently lifted his growth forecast from 8.3 percent.

For Asia alone, the semiconductor industry is projected to generate $67 billion worth of sales in 2003, up 14 percent on the year, added Philip Koh.


Gordon argued that "all the classic signs" of a recovery across the manufacturing chain could be found: wafer fab utilization is currently exceeding 80 percent (it broke the key 85 percent level in the second quarter) and foundry wafer pricing has firmed up; in packaging and assembly, overall utilization is exceeding 80 percent and leading-edge capacity has become tight as the demand for advanced packaging solutions grows.

"Once again the packaging and assembly continue to lead the recovery. As in the past, it is anywhere up to 6-12 months ahead of the rest of the industry," pointed Jim Walker, vice-president of manufacturing research at Gartner. This segment of the industry is expected to grow 22 percent this year

Meanwhile, device demand is showing signs of strength, with inventories back to normal levels and stable pricing; the PC market is strong and inventory are now at "normal" levels.

"The PC market had been in the doldrums for the last 2-3 years, but some strength is returning to the market You only have to look at the recent comments by Intel's to see clear sign of strength in the PC market," Gordon pointed.

Last Friday, Intel Corp., the world's largest maker of microchips, boosted its forecast for revenue and profit margins because of stronger demand from computer makers. The company said it now expected revenue to rise to a range of $7.3 billion to $7.8 billion, up roughly 11 percent from the second quarter.


Gartner estimated that shipments of personal computers rose 10 percent in the second quarter. As a result, JP Morgan has just raised its expectations for PC growth this year, saying it now expects 8-9 percent growth in the numbers of computer shipped, up from a previous forecast of 7 percent.

But despite all those positive elements, there are still some negative signs which are pointing to caution: order visibility is still poor and there are yet no signs of corporate PC replacement cycle, especially in Europe, while the wired communication market remains "dead."

"There is turmoil in the world these days and businesses are being cautious about spending on things like computer technology," Gordon pointed.

Indeed, Intel Chief Executive Craig Barrett was quoted as saying that despite the company's higher revenue forecasts it was still too early to predict a recovery in the information technology sector.

Gordon believes the long-awaited corporate PC replacement cycle will be characterized by incremental increases in IT spending spread over a more prolonged timeframe than has seen in the past. "While this trend would underpin a sustained semiconductor recovery, it may act to temper headline annual revenue growth," he warned.

For 2004 and 2005, Gartner is predicting the industry will grow 21.1 percent and 18.6 percent, before contracting 4.7 percent in 2006 and growing back again by a modest 8.4 percent in 2007.


"As we see an increase in profitability in the industry, capital spending will increase, leading eventually to oversupply and a softening of the market in 2006," Gordon predicts.

In Asia, Koh expects the industry to grow by more than 20 percent in 2004 and 2005, lead by buoyant demand in China, South Korea and Taiwan, the three biggest semiconductor markets in Asia. "We can see strong growth on the horizon in China, led by data processing, the communication and consumer markets," he says.

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