Are we forever blowing bubbles?
12/01/2003
Recently, I looked for an upscale, Wi Fi-ready notebook computer at a major computer store. It had to have fast graphics, compatibility with 802.11b and g (back compatible with a), and Hot Spot capability for wireless Internet links. The store clerk said that the model I liked was not only out of stock, but also could no longer be ordered. Instead, the store would wait until newer models came out for the holiday season rather than replacing out-of-stock notebooks, which had been completely cleaned out over Labor Day by mobs of buyers who also bought up all the store's large plasma-screen TVs.
My choices: wait, downgrade, or go somewhere else. I vaguely recalled that Intel seemed to be having some trouble keeping up with Pentium 4 orders and thought perhaps that might also be part of the reason no top-of-the-line notebooks were available. A CEO in Silicon Valley recently showed me a tablet PC on which he kept multiple files of multicolored, hand-labeled diagrams illustrating his company's innovative process technology.
"I'm lucky to have this machine," he said, "You have to get on a waiting list because engineers all over the Valley want them."
Although these are anecdotal incidents rather than a scientific survey, the pattern fits with what seems to be happening all through the semiconductor food chain. After living through the terrible fallout of the bursting of the last bubble in the industry cycle, with hundreds of thousands of jobs lost and myriad companies down the drain, we don't want it to happen again. Thus, management everywhere is being super-cautious (except perhaps in China). A few months ago, analysts were talking about inventories being down so much that we were at the start of a strong up-cycle. Instead, inventories dropped even lower, and capacity utilization for the chips to support all the nifty new technology has moved well over 90%. The IDMs are saying they will go to foundries for extra production capacity when they hit their limits, and the foundries are saying they won't buy more tools until the chip orders are on the books.
Meanwhile, how many potential equipment buyers are being shunted aside and told to wait for a newer, even cooler model to come out? Is the hope that all the potential buyers will go to cheaper models instead? No wonder ASPs have eroded. How much pent-up demand does the industry need? Businesses have radically lowered their cost structures, and as the economy picks up and profits rise again, most of them will be going through a replacement cycle not only for PCs and cell phones, but also corporate networking gear and storage systems. Will the chipmaking capacity to turn out the new technology be there as the demand escalates?
Mike Splinter, president and CEO of Applied Materials, commented at Semicon West that in any past cycle with capacity for advanced chips as low as it was in mid-2003, "chipmakers would not only be ordering new process tools, they would be ordering urgently." While there was a pickup in orders over the last half, however, it has been slow and gradual. Ed White, analyst for Lehman Brothers, points out that in the old days the highest-performance chips were only needed for powerful equipment like workstations and servers. Now, with high-resolution, high-speed graphics and fast internet demands, advanced chips are needed for a wide range of notebooks, cell phones with color displays, digital cameras, flat-panel TV sets, and Internet PCs. The tools needed to make those advanced chips are now pressed to keep up with demand, and there has been no rush to order new ones.
If there is a surge in demand, and rising global economies suggest one is coming, we will see another frantic round of equipment ordering as every chipmaker tries to increase its share of fast-growing market segments. That could be the beginning of another bubble — maybe even a bigger one this time.
Are we forever blowing bubbles?
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Robert Haavind
Editor in Chief