Is the past a prologue for this cycle?

Franklin Kalk, CTO, Toppan Photomasks Inc., Round Rock, TX USA

Every semiconductor downturn raises two key questions: How long will it last, and who will survive? For answers, we must look at the causes of these cyclical events, and hazard some crystal-ball gazing into the current crisis.

These downturns are always characterized by oversupply stemming from overbuilding, reduced demand, or both. In 2001, the last serious downturn, irrational expectations fostered by the boom and “the Internet as killer app” led companies to install excess manufacturing capacity. But the bust and 9/11 precipitated dramatic reduction in demand. As a result, global semiconductor sales plunged from a record $204 billion in 2000 to $139 billion in 2001 — a 32% drop.

This time, a volatile mix of extreme leverage and the collapse of credit markets are pulling the global economy into a downturn that will reverberate globally in 2009, and perhaps beyond. Meanwhile, consumers account for about two-thirds of the U.S. Gross Domestic Product, and they cut back when they are worried about the economy. Because semiconductor sales now are so dependent on consumer electronics (versus the past’s PC focus), the industry is more vulnerable to consumer emotion than it was in 2001.

On the positive side, this landscape differs from 2001 because, with the exception of NAND flash, overbuilding is not a significant factor. So, we are primarily in a demand-driven downturn, and consumer spending might begin to pick up when lenders get back into business — this will affect how long this crisis lasts.

As for the second question, there will be consolidation: size will matter. Availability and efficient use of capital will be paramount. The survivors will have the cash to ride out the downturn, gain market share, and make strategic acquisitions. They’ll drive efficiencies as customers and suppliers align business models and develop strategies and products to support existing and new markets. This inevitable evolution will be painful for some, but it will position the industry better for the continually changing global economy.


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