Chip future hard to see

Last week, Taiwan Semiconductor Manufacturing Co (TSMC, 台積電) chairman Morris Chang (張忠謀) added his views to a small number of industry pundits that say semiconductors are at or near the bottom.

The founder of the semiconductor foundry model, manufacturing chips to customers' design specifications, was quoted saying he expects the semiconductor market to reach bottom around April or May, but that the rebound will be painfully slow at best.

His comments came following a report put out by Salomon Smith Barney analyst Jonathan Joseph, who said two weeks ago that the semiconductor industry is near the bottom of the current industry down cycle and poised for an upturn. For the past 20 years, the semiconductor industry has danced in step with a two years up, one year down boom-bust cycle.

Normally, the opinion of one chip analyst might not move markets as much as Joseph's call did when it came out, but the Salomon analyst made a name for himself last July by being first to call the industry downturn. Nearly two months passed before another analyst backed his claim. Now he says the end of the bust is nigh, and pointed to Taiwan's motherboard makers as one indicator.

Motherboard makers in Taiwan, including Asustek (華碩), Gigabyte (技嘉) and Micro-Star International (MSI, 微星科技), produce 80 percent of the world's motherboards, which go in personal computers. Profits from these companies have edged up over the past three months, with solid monthly sales. Since PCs contain such a high amount of semiconductors, demand for new PCs is an indicator of chip industry health.

Industry analysts who do not agree with Joseph say this is soft data, not reliable in predicting demand. Joseph points out that once hard data comes out, the market has already moved.

To be sure, analysts have said Joseph made the call too early, and predict the bottom will come in the second half of the year. Morgan Stanley analyst Mark Edelstone, winner of the analyst of the year award from Institutional Investor magazine, took Joseph on head to head, saying the "bottom" call was too early.

An indication Edelstone may be right came from Cisco Systems, who last week announced it would write off US$2.5 billion in excess inventory. They will take a loss on much of this equipment, and dump some on the market. Some analysts believe almost US$800 million of Cisco's excess inventory is in DRAM memory chips, which the company will dump on the already moribund DRAM market.

Excess inventory has been a key concern this year, and one analyst in Taipei says the inventory glut might not clear until the end of this year. When the average selling price (ASP) on chip orders to foundries like TSMC and rival United Microelectronics (UMC, 聯華電) actually begins to fall, he said, that will indicate inventories are clearing.

"Right now, [buyers] ... are not placing orders. When buyers come back into the market and start buying, that's the point when we would see a little bit more pricing ASP decline," said Dan Heyler, regional analyst at Merril Lynch-Taipei.

Most of the rest of the semiconductor industry, and the information technology industry in general has stopped trying to predict a turnaround, saying visibility is too poor. All agree, however, that the second half of the year should be better than the first -- which is not saying much.