BUSINESSWEEK ONLINE : MAY 10, 1999 ISSUE
NEWS: ANALYSIS & COMMENTARY

Chipmakers: At Last, an Upturn


Mattson Technology Inc., a $60 million maker of semiconductor manufacturing equipment, laid off 20% of its 370 employees in 1998 and shut its factory for two weeks for lack of orders. The chip slump last year drove Mattson's revenues down 23% and led to $22.4 million in losses. But now, Mattson is riding an updraft. Employees are working overtime to meet exploding demand, and the company is hiring 50 people. ''We're seeing a big acceleration,'' says Brad Mattson, CEO of the Fremont (Calif.) company.

Mattson and everybody else. For the first time in a year, monthly revenues for the $125 billion semiconductor industry rose in January. Analysts now predict a 10% expansion, to $138 billion, in 1999. First-quarter earnings for chip companies tracked by First Call Corp. rose 33% over the same period in 1998. ''There's no question, this recovery is real,'' says Mark Edelstone of Morgan Stanley Dean Witter.

At Taiwan Semiconductor Manufacturing Co., the world's largest contract chipmaker, factories are running at 88% of capacity, vs. 67% in the fourth quarter. The reason: growing demand for chips in everything from PCs to cellular phones to automobiles. Chipmakers will produce some 280 billion parts this year, up 9% from 1998, says Semico Research. In March, the ''book to bill'' ratio of orders to shipments for semiconductor equipment--a leading indicator of future chip output--hit 1.3, a sharp improvement from 0.75 last October. Chip shares are also up: The Philadelphia Semiconductor Stock Index has more than doubled since last fall.

Not all the news is good. Prices for dynamic memory chips, which account for 12% of industry revenues, stabilized late last year but have plunged 30% since February. Analysts are still expecting DRAM prices to bounce back and revenues to climb 25% this year. But profits may continue to be more elusive: Asian DRAM giants such as Korea's Samsung and Japan's NEC remain firmly in the red.

HOPE IN NETWORKING. There's also a price war under way in microprocessors. Shipments should grow more than 15% this year, but because of price pressure, revenue will rise just 8%. Intel Corp. (INTC) has been aggressively cutting prices, putting the squeeze on National Semiconductor Corp. and Advanced Micro Devices, both of which posted first-quarter losses. Intel itself is expected to see a 28% jump in profits, to $8 billion, this year, mainly on the strength of high-end chips, and new products such as networking chips.

Indeed, the best hope for the chip industry lies in everything but computers. In addition to the deflation of PC prices, there is the prospect of an overall slowdown in computer sales as companies turn their attention to solving Y2K problems. But sales of chips for communications, networking, and consumer electronics are expected to soar.

The main threat to a chip comeback is overexpansion. Chipmakers tend to add capacity at the same time--and too much. ''We're like lemmings running off the cliff together,'' says Mattson. While demand for memory chips should catch up to capacity in 2000, for instance, new plants will drive capacity ahead of demand again in 2002, says Dataquest Inc. analyst Bruce Bonner. But for the moment, the semiconductor business is, er, in the chips.

By Andy Reinhardt in San Mateo, Calif., with Irene M. Kunii in Tokyo and Jonathan Moore in Taipei

To read a correction/clarification about this story, click here.

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This Y2K Bug Is Already Loose

CHART: A Two-Quarter Dip

Chipmakers: At Last, an Upturn

CHART: Chip Revenues Have Stopped Shrinking



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