Chips are forecasting for pain for tech sector

If you hang about in Silicon Valley and listen to all the startup talk, then you wouldn’t know that it is a tough world out there. However, somewhere out there, dire economic conditions and political uncertainty are starting to impact the technology sector. No, I am not talking about social media IPOs that are taking a dirt nap. I am talking about the chip business — which is sort of a canary in the coal mine.

Since chips form the basis of a lot of products people buy — PCs, phones, MP3 players, televisions, digital video players and cars — any slow down in chip business is a result of slowing demand from those end markets. Declining sales of PCs or other gadgets do have an impact on retailers, software companies and other ancillary companies.

Since most companies order chips quite in advance to build their product, the early slowdown in chip demand means that things are going to slow across the ecosystem. So, when chip sellers are doing fine the technology ecosystem can party. But when chips forecast pain, then it is a pain that is felt across the food chain.

IHS iSuppli recently downgraded their outlook on the semiconductor market. They were forecasting 3 percent growth for 2012 but now they expect the market to contract by 0.1 percent. This is the first time chip industry is facing an annual decline since 2009. “The expected decline in 2012 represents a major event for the global semiconductor market,” said Dale Ford, senior director at IHS.

What is to blame? Well, the PC business isn’t doing too well and that is dragging down everything else, including the wireless chip business that is doing well thanks to the smartphone demand. The guys bearing the brunt are Intel (s INTC) and AMD (s AMD). Of course, we already saw the impact of PC demand declines in poor results from both Dell (s DELL) and HP (s HWP). A lot of the slowdown has to do with the economic downturn in Europe.

Sterne Agee, a brokerage cut their estimates on both the PC chip giants this morning, worried that things aren’t going to get better, despite the release of the Windows 8 into the market this year. They are saying that the PC sales are going to be flat for 2012 versus 4 percent growth they were expecting previously.  In a note to his clients, Sterne Agee analyst Vijay Rakesh wrote:

We believe while expectations in the PC Supply chain are high for Win8, actual PC OEM builds-sell through might fall short given the plethora of Ultrabooks, Touch, WinRT, Android, Win8, and iPhones launched in a limited holiday window in 4Q12 post a late October Win launch, with potential inventory overhang into 1H13.

With overall Tablet/mini-iPad prices approaching the magic clearing price of $299-399, we believe target processor ASPs are in the $20-$50 range, a challenge to selling a high-end $100-$150 Corei3-i5 into the Tablet market. The Handset Market is becoming a big barbell with Apple-Samsung at One End and China at the Other End – An increasingly limited and competitive market opportunity with a more limited Handset OEM-base, declining ASPs and IP patent challenges.

In other words, it would be companies like ARM and Qualcomm (s QCOM) that will continue to dominate the wireless chip business. Looking forward, IHS iSuppli is projecting that revenues in the chip business are going to grow 9.1 percent in 2013 but are warning that “multiple high-impact events still present the risk of a strong downturn in the economy in 2013, which would also pull down the electronics and semiconductor industries.” Which in turn means, bad news for rest of the chip business.