Chipmakers make the “nice” list for the holidays, say analysts

by Matt Wickenheiser, Contributing Editor

Two of the most hyped demand drivers for holiday electronics sales aren’t working out as hoped — PlayStation won’t launch in Europe until March of ’07, and Sony has halved its shipment target for this year to the US and Japan. But, there’s more to life than video games. Analysts interviewed by WaferNEWS are still pretty bullish that the holidays will prove festive for chipmakers.

“We’re still seeing some strong demand in home entertainment, although there’s been some delays on the game console side,” said Jim Feldhan, president of Semico Research Corp. Digital TV sales “still look really hot,” he said, as does continued adoption of wireless technology in homes, ranging from routers to wirelessly connecting TVs with home stereo systems.

While the DVD market is mostly a replacement one these days, DVRs remain hot as part of that home entertainment sector, said Feldhan, noting that falling prices–now around $200-$400, vs. $800 last holiday season–make them even more attractive to consumers.

Doug Andrey, principal industry analyst at the Semiconductor Industry Association (SIA), pointed to flat-panel TVs as “one of the hottest selling items” across the entire consumer electronics sector. “They’ve just surpassed expectations. Prices have come down to the extent that people just find compelling reasons to buy,” said Andrey.

Gas and home heating oil prices continue to drop, which should loosen up some discretionary income for consumers, positive news overall for holiday spending, he added. “People have an extra $500 dollars to spend.”

Richard Gordon, managing VP for semiconductors at Gartner Dataquest Research, agreed that manufacturers will heavily push LCD and plasma TVs this holiday season, benefiting chip vendors such as Pixel Works, Trident and Genesis. He predicts retail prices for LCD TVs will flatten out in 4Q, and maybe further into 1Q07 depending on sales volumes.

Doug Freedman, senior analyst at American Technology Research, believes companies aligned with the traditional consumer space of PCs and handsets could see a slight seasonal uptick. “The biggest thing we’re looking for is to see good sell-through from the consumer segment,” he said, noting that the holiday season spotlights how well companies are planning new products and bringing them to market in a timely fashion.

Some of the hottest technologies, such as music- and video-enabled handsets, are still gaining momentum, poised for growth in 2007, according to Freedman. A potential sleeper market is wearable electronics, incorporating existing technologies such as Bluetooth, MP3 players, and GPS systems into sunglasses or wristwatches, he said. A few years ago such devices “were perceived as a joke,” but now this segment “really is starting to evolve into a market.” Gartner’s Gordon pointed to another emerging category to watch: portable navigation devices (PND) from companies including TomTom, Garmin, Magellan, and others.

Analysts: Inventory seems to be at sweet spot
Analysts interviewed by WaferNEWS indicated the industry seems to be in a fairly good situation with regards to overall inventory levels heading into the holiday season.

“I think inventory levels rose slightly in expectation of a strong back half, and that we dampened the sales pretty quickly as soon as we got concerns” about end market demand and the overall economy,” said Doug Freedman, senior analyst at American Technology Research. In fact, “there might be spot shortages at the end of the year,” he predicted.

Gartner Dataquest Research noted a tick up in semiconductor supply chain inventory in both 1Q and 2Q, but that it’s still only about 10% above the ideal level and “therefore not a problem at this stage,” said Richard Gordon, managing VP for semiconductors. “We believe that semiconductor vendors remain very sensitive to increases in inventory in the channel and will likely moderate output in order to bring inventories back under control, as they did in 2004 when the same trend was observed,” said Gordon.

Freedman said he wouldn’t be surprised if there’s a slightly stronger than expected first quarter, with inventory restocking and requests from OEM partners to carry more buffer stock. “If you talk to semi companies they may tell you it’s leaner than they’re comfortable with,” he said. Chipmakers’ efforts to moderate output and keep inventories down “will be especially important ahead of the seasonally weak 1Q,” said Gordon, “to ensure that sequential semiconductor sales revenue growth does not decline too dramatically from 4Q to 1Q as demand weakens.” — M.W.

So who will benefit the most from the consumer-driven holiday season? The insatiable demand for memory continues, particularly for flash, and in a wide variety of goods. “We’re hoping that the NAND appetite continues. There’s a tremendous amount of capacity for the market, and that demand needs to stay there,” said Feldhan.

NAND flash prices slumped during the first half of the year, meaning that consumers can now buy much more storage for significantly less — fueling demand,” noted Gartner’s Gordon. He expects NAND prices will firm up due to intensified demand, particularly for flash cards, portable media players, and USB flash drives, which collectively represent the vast majority of NAND flash consumption. He also predicts a possible 3% undersupply in 4Q, as customers purchase multiple gigabytes of storage for those electronic devices.

Providers of WiFi and Bluetooth chips will continue to benefit from the ongoing wireless revolution, Feldhan noted. Strong cell phone sales would also benefit DSP and analog manufacturers, noted Andrey.

IBM has a hand in all the main processors for the next generation video game consoles, noted Gordon, though he warned to watch the supply situation for those consoles, particularly the PS3. ATI may benefit with the GPU design for the Xbox 360 and the Nintendo Wii, he said, and chip vendors with design wins in the new iPod lineup should also see a benefit.

Perhaps the most troubling sign of this holiday season lies with consumers themselves. “The hardest thing for us to do is to forecast consumer behavior,” Andrey said, acknowledging “the black hole of visibility between Black Friday and Christmas.” Still, consumers have shown a hunger for the newest and greatest electronics, “and part of what you have to do is build it so they will come.” He quipped that a constant worry the appearance of a new product that would be the equivalent of the once-hot Pet Rock — which may have been high in silicon content, but not of the computer-chip variety. — M.W.


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