Chip gear woes signal more trouble ahead for tech

As chip equipment goes, so goes the electronics industry and the rest of high tech.

It's a pretty simple equation. Electronics gadget makers get silicon from chipmakers, which get production gear from companies like Applied Materials and ASML. So when chip gear suppliers go south, you can bet the entire electronics industry (and the overall tech industry) is in a funk.

And it is. Appearing on CNBC Thursday morning, Peter Wennink, chief financial officer of Netherlands-based chip equipment maker ASML, said the "sudden drop in end demand for electronic products...is forcing our customers to announce severe cuts in their production." Who are ASML's customers? Companies like Toshiba, Taiwan Semiconductor Manufacturing Company, Samsung, and Intel, which supply the electronic guts to customers like Sony, Nokia, Compal Electronics, and Hewlett-Packard. (Samsung and Toshiba are also large consumers of silicon from the chip-making arms of their companies.)

Thursday, ASML announced that it was cutting 10 percent of its workforce amid an "unprecedented" downturn. "Never before have we witnessed such a sharp and sudden fall-off in lithography system demand," said Eric Meurice, chief executive officer of ASML, in a statement. He attributed this to "an unprecedented mix of falling end-demand for semiconductors, weak memory prices and restricted access to capital for our customers."

Meurice went on to cite one of ASML's biggest customers, Toshiba, which announced on Monday night that it was cutting production for flash memory 30 percent, starting in January. Flash memory is one of the staple components of consumer electronics and computers and is used in everything from portable music players to digital cameras to PCs.

ASML plans to shut down production facilities for four weeks, spread over the first and second quarters of 2009. ASML's restructuring follows a similar move by U.S.-based Applied Materials, the largest chip gear supplier. In November, Applied said it was paring its global workforce by 12 percent or 1,800 positions. For the fourth quarter, Applied said fiscal 2008 net sales were $8.13 billion, down from $9.73 billion from 2007.

Semiconductor equipment forecast; a recovery isn't expected until 2010.

(Credit: Semiconductor Equipment and Materials International )

"We're at levels we last reported in 2003," Dan Tracy, senior director industry research and statistics at SEMI, said in a telephone interview. Semiconductor Equipment and Materials International provides market data for the global semiconductor equipment market. "In our most recent data through October, orders for semiconductor manufacturing equipment were down over 50 percent from the peak in 2007."

Tracy said orders for automotive chips--a giant market--have also "slowed down dramatically in the fourth quarter."

Japanese chip equipment makers, some of the largest in the world, saw orders sink 71 percent in November from the same month last year as customers cut spending, according to a Reuters report Wednesday, citing the Semiconductor Equipment Association of Japan.

"This was the 21st straight month of year-on-year declines as the financial crisis hurts consumer appetite for computers, digital cameras, and TVs," Reuters reported.

To top off the bad news, market research firm iSuppli issued a report Wednesday forecasting that worldwide semiconductor industry revenue is set to decrease by 9.4 percent in 2009 to $241.5 billion, down from $266.6 billion in 2008. iSuppli had previously predicted 6.8 percent growth for the same time period.

In the more immediate future, iSuppli said in the fourth quarter "excess semiconductor inventories could balloon up to $10.2 billion in value, up 268 percent, from $3.8 billion at the end of the third quarter."

Steep worldwide recessions "have resulted in a pullback of consumer spending on all types of electronic products," iSuppli said, leading the firm to forecast a decline in OEM (original equipment manufacturer) factory revenue for electronics equipment of 1.3 percent in 2009. The previous forecast had predicted 6.7 percent growth.