Intel's fourth-quarter warning is not only bad news but bad timing. With the Consumer Electronics Show kicking off Thursday adorned by all those bright, shiny gadgets, Intel effectively said: gadgets maybe, but not so bright and shiny.
And for an Intel warning, this one was particularly dire. The biggest chip bellwether said it now expects only $8.2 billion in revenue for the quarter, a 23 percent drop from the year-earlier period, and 20 percent from the third quarter. And this comes after issuing a warning on November 12.
So what's happening? The clearest example of the gloom that has descended on the chip industry, and by extension computer and gadget makers, came relatively early from another chip bellwether, Taiwan Semiconductor Manufacturing Company -- the largest chip contract manufacturer, which supplies chips to all the first-tier electronics and computer makers. Back on October 30, TSMC issued a forecast that set the tone for the rest of the industry: CEO Rick Tsai said the supply chain -- the myriad of companies that order chips from TSMC -- was "reducing inventory very aggressively."
That supply chain, either directly or indirectly, is the computer and gadget makers of the world.
So going into CES, the picture is not pretty. "We just heard consumer electronics sales over the holidays were down 26 percent year to year," said Broadpoint AmTech analyst Doug Freedman. "You want to head into CES with a pall over it? There it is, right there."
And go the other way, up the supply chain -- the chip gear makers who supply production equipment to chip companies -- and things are even more bleak, with some gear makers saying they don't expect any orders at all in 2009 for certain categories of equipment. In December, Netherlands-based ASML CEO Eric Meurice said that "never before have we witnessed such a sharp and sudden fall-off in lithography system demand."
Other examples are almost too numerous to list: for starters, Toshiba and SanDisk slashing flash memory output 30 percent, Taiwan's memory chip industry on the verge of collapse, and Micron Technology posting a massive $706 million loss.
Yes, there's probably a silver lining in all of this, in that chipmakers and gadget suppliers have to cut the fat and become lean and mean, but where does it end?
And how will this downturn transform the computer industry? Looking at it through the prism of Netbooks -- which are expected to catch much of the limelight at CES -- may provide some insight. These cheap laptop computers are on fire, partially because they are compelling designs but mostly because of price. Good thing? Yeah, great for consumers and small businesses that are finally realizing they don't have to pay $2,000 for a small, lightweight ultraportable notebook. Or simply can't afford a $1,000 notebook.
But not so great for Intel, Apple, and others. "What is the most expensive laptop out there? The Apple (MacBook) Air," said Freedman. "That's a $1,500 or $2,000 machine. Now all of a sudden I'm giving you ultraportability for $500," he said, referring to the price of a Netbook.
In this sense, over-priced notebooks could be seen as roughly equivalent to large SUVs -- overkill. Just as General Motors must wean itself off lumbering SUVs, so may Intel, Hewlett-Packard, Sony, Toshiba, et al., be forced, to some extent, to wean themselves off high-profit notebook computers. After all, what took Sony so long to bring out a Netbook? And why don't we see an Apple Netbook? It's not a stretch to say that those companies don't like the idea of selling a lot of inexpensive computers.
At CES, companies will be hawking flashy gadgets, as always, and maybe attendees can suspend disbelief for a few days blinded by the glare of the gadgets. But that's really just lipstick on a pig.
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.
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