When Things Looked Good
There is no confidence to match the confidence on the eve of disaster. Back in December 2000, on the eve of the disaster year of 2001 and the subsequent slow-growth decade, the semiconductor industry’s mood was massively upbeat.
“We’re on allocation for many major products. Everything is sold out six months ahead,” says Atmel’s marketing v-p Jeff Katz. The company’s CEO George Perlegos reckons: “The up-cycle will continue for the next three years”.
Pasquale Pistorio, CEO of STMicroelectronics, agrees with him: “When we reported our Q3 results, we said we see a strong Q4 – growing on Q3 – and we see 2001 as another strong growth year with growth of 25 to 30 per cent and for us – we’ll grow faster. We said that one month ago, and we see no reason to change our forecast for a strong Q4 and a strong 2001.”
“We made capital investments of $950m in 1998, $1.5bn in 1999 and $3.2bn in 2000 – the third largest after Intel and TSMC,” adds Pistorio, “there are two reasons why we have confidence: demand is very strong and will be strong for the next ten years – we are just at the beginning of the e-commerce era; secondly, supply. The normal capital expenditure level of the industry is 23-27 per cent of sales. If we spend below that – there’s shortages; if we spend above that – there’s over-supply.”
According to Pistorio: “Last year, we spent less than 23-27 per cent on capital expenditures and this year we are spending 28 per cent so we’re not going to affect the supply situation adversely. I expect we’ll see the next slowdown in the second half of 2002.”
‘Fred Shlapak, president and CEO of Motorola Semiconductor, agrees. “The fundamental issue is that the semiconductor market will grow 40 per cent this year. Some people have too much inventory which affects the market temporarily, but re-sales are strong through distribution. We have to be cautious for a few weeks”.
‘Shlapak projected a 2000 semiconductor market worth $212bn and a 2001 market worth $250bn. He pointed out that Moore’s Law remains a formidable driver of decreasing cost per function. “O.13µm gives us 200,000 gates per square centimetre of silicon; in 18 months time that’s 350,000 to 400,000 gates and, eighteen months later, it’s 600,000 to 800,000,” adds Shlapak.’
‘Moreover, a lot of the products which this capability produces are system-on-chip (SoC) type of products which are very often sole-sourced and priced to value.
Robert Grant, v-p of marketing at International Rectifier, points to the company’s move up the value chain into power systems modules, for which many supply contracts are sole-sourced, and which provide profits of 30-40 per cent.’
“We used to get $2 of revenue for every $1 of investment in capacity. Now we’re getting $4 to $5 for every $1 of investment in capacity,” says Grant, “we’ve doubled in size in the last two years, we’ve paid off all our debt, we have $800m in cash and we expect to grow at 40 to 45 per cent next year.”
‘It’s a similar story at Analog Devices, where the managing director of the German subsidiary, Paul Loser, points out that the company grew 78 per cent this year – growing 105 per cent in signal processors which are doubling in revenues annually. The company expects to grow at more than 78 per cent in 2001.’