Semiconductor manufacturers are being urged to raise research and development (R&D) spending for strategic innovations and help revive the global chip market. The call was made by Microchip Technology president and chief executive Steve Sanghi in Hong Kong this week amid the prospect of a lingering worldwide economic downturn that could keep semiconductor sales sagging through next year. 'Companies must now invest in new product development to be well-positioned for the industry rebound,' he said. Mr Sanghi said that by focusing resources on innovation to create enhanced processors, 'greater customer satisfaction and business success can be achieved even during these industry down cycles'. The push for increased innovation comes as the industry's global market revenues are projected to fall 26 per cent this year to US$168.1 billion, after two years of significant growth. Global semiconductor revenues last year totalled US$226 billion, according to research firm Gartner's Dataquest unit. 'There are few signs of growth in design wins. Component prices and lead times are still low, and electronic system component demand is weak,' said Mary Olsson, chief analyst for Dataquest's worldwide semiconductor group. 'Based on guidance and early reports from some of the larger bellwether companies involved in PCs, storage and communications, the second half of 2001 will be dismal for the semiconductor industry.' Overall semiconductor prices were still declining in May and June this year. Memory-chip pricing also remained under pressure. Dataquest analysts said lower unit sales were responsible for revenue declines. According to hi-tech market research firm Cahners In-Stat Group, the economic slowdown has even forced semiconductor giant Intel to delay one of its three next-generation chip fabrication plants supporting 12-inch silicon wafers from the second half of next year until the third quarter of 2003. Intel, despite that setback, has committed the most R&D investment in the chip sector, with US$7.5 billion in capital spending this year from US$6.7 billion last year. That represented the kind of commitment Microchip, one of the world's top makers of low-cost embedded control chips, wanted the rest of the industry to follow. 'When the semiconductor market began to slow down late last year, we realised an innovative strategy would be required to strongly position Microchip for steady growth,' Mr Sanghi said. 'So we increased our R&D investment from 9 per cent to 14.3 per cent to expand our embedded product offerings. Today, we are extremely profitable while many of our competitors are losing money.' The Arizona-based company makes specialised chips that are used in thousands of applications across a wide range of industries that include the vehicle, wireless communications, consumer, office automation, computing and industrial-control markets. Some of its chief competitors include Motorola and ST Microelectronics. Recent Microchip innovation included a new manufacturing technology for Flash microcontroller chips that cut production cost and programming times, as well as boosting product reliability. Microchip estimated the worldwide market for eight-bit Flash microcontrollers would reach US$1.5 billion by 2003, from US$600 million last year. Mainstream roles for Flash memory chips include vehicle sub-systems, networked home appliances, home medical appliances, remote controls, parking metres and vending machines. The company's Asia-Pacific sales for its 2001 financial year to March 31 reached US$240 million, from total worldwide sales of US$716 million. Mr Sanghi said that while design activity primed Microchip for future growth, global semiconductor demand remained soft. Klaus Rinnen, Dataquest's chief analyst and director of semiconductor research, said: 'Capacity spending is under the industry's control, but the economy is not. There are also no hot new applications with the size to pull the industry out of the slump by 2002. Application demand needs to get better across the board.'