Despite a Sharp Downturn, There is Hope for Chipmakers

This morning, research firm Gartner said the semiconductor industry would decline by 16.3 percent in 2009 to a $219.2 billion industry. This is quite a revision from last month, when it forecast chip sales would decline only by 2.2 percent in 2009. This is a dismal confirmation that many consumers — like me — have held off on gadget purchases this year.

With consumer electronics comprising more than half of the total chip market, the industry has been hard hit by folks putting off purchases of cameras, PCs and cell phones.  All the signs, from earnings cuts to the slowdown’s effect on outsourced chip-manufacturing companies, paint a bleak picture. But don’t panic just yet. The chip industry has withstood recessions, changes in business models and even tries to circumvent the laws of physics, so there’s still hope. Here are a few bright spots that should help the industry find its way out of this morass, likely in early 2010.

  • The transition to 4G networks. This may slow, but it’s inevitable and replacing a network means upgrades across the board. It also means one more chip to add to a laptop, CE device or handset, and that more people will find a use for such devices.
  • More chips in cars. Yes, the auto industry is hurting, but faster wireless networks, more safety features and even energy-efficiency concerns mean more silicon in our cars. This is great because these chips aren’t replacing older technology; they’re accessing new markets entirely.
  • Troubles could reduce oversupply in the memory market. This should help halt a price war that has hurt suppliers.
  • White spaces broadband. This won’t happen until 2010, but it will drive the sale of chips in base stations or mesh networks, as well as in end devices.
  • Intel. It might not lead the industry out, but it could come out on top if the recession doesn’t dip too deep for too long. The top chip company still makes all of its own chips. As the downturn deepens, the contract manufacturing firms for the chip industry are cutting back. That’s good, but it could lead to supply problems if they can’t ramp up in time when the recovery hits. In contrast, Intel (s INTC) is still moving to 32 nanometer, which will allow it to make more chips at a smaller size. It has been agressive about using its fabs to quickly shift its production in response to demand — important in an industry where fabs have to run 24 hours a day to stay cost effective.