Amid all the doom and gloom about collapsing semiconductor prices there is an end in sight to the woes of producers, according to SBC Warburg. Two reasons to be cheerful are linked to announced production cutbacks and a new generation of graphics and audio-visual software that will need more powerful chips to drive them. In recent weeks we have seen Korean, Taiwanese and Japanese semiconductor producers announce production cutbacks. Motorola last week said it was drastically cutting spending on its semiconductor business. It has introduced a voluntary redundancy scheme open to all of its 20,000 United States semiconductor employee workforce, a hiring freeze is in place and plans to build a new plant in Virginia have been put off. Prices of the industry's main product, DRAMs or Dynamic Random Access Memory chips, have fallen more than 70 per cent this year. They have been falling because demand growth has slowed as the growth in personal computer sales slowed just when massive new 16-megabyte DRAM production capacity came on to the market. Sales of new personal computers, of which DRAMs are a central component, in Europe and North America dropped well below the expected 25 per cent growth forecast for 1996. This saw second quarter orders for chips down 34 per cent on an already depressed industry. Yet the key book-to-bill ratio, a measure of demand and supply in the semiconductor industry, for June was 0.91, after hitting 0.78 in April. When the ratio is at one, demand and supply are in balance. If it is greater than one then demand exceeds supply. In October last year it reached 1.25 at its peak. New chip orders in the United States were US$3.11 billion in June against $3.09 billion in May. This year semiconductor industry revenues are expected to grow by between 7 per cent and 15 per cent from $144 billion last year. Warburg's Jonathan Dutton and Jae Ho Rhee say next year and 1998 look better. The production cutbacks mean the forecast 70 per cent rise in production capacity expected in the next 12 to 18 months will probably shrink as more projects get delayed. Warburg suggests production capacity might grow at a more modest 10 per cent. Demand for DRAMs is expected to rise by a quarter. Part of the increase in demand is likely to come from the boost to PC sales caused by the launch of Windows NT 4.0 scheduled for the end of the year. This software will have a projected memory requirement of at least 20 megabytes, and perhaps as much as 32. This might trigger the long awaited corporate upgrade from the old 486 work-horse to the Pentium Pro. This will produce substantial demand for DRAMs and should stabilise prices. Any big rebound in prices will be short lived as this will attract more production capacity on to the market. While Motorola's woes reflected semiconductor industry troubles last week, Intel offered positive new indications things could get better. Intel, the dominant producer of microprocessors for computers, reported 18 per cent growth in earnings to $1.04 billion for the second quarter on a 19 per cent sales gain to $4.62 billion. It said demand for its Pentium chips was fundamentally sound and company profit margin jumped from 47.9 per cent to 53.5 per cent.
