Wed, Jul 30, 2003 - Page 10 News List

S&P hopeful, but still cautious

NOTORIOUS VOLATILITY Standard & Poor's yesterday said that several indicators pointed to an Asian recovery, but reminded investors that tech stocks were mercurial

By Bill Heaney  /  STAFF REPORTER

A leading credit rating service said yesterday that there were initial signs of a recovery in Asia's technology industry, but warned against early optimism, as the tech sector is notoriously volatile.

"Despite some tentative signs of a recovery in Asia's technology sector, there have yet to be clear signs of a turnaround," said John Bailey, a director at Standard & Poor's Ratings Service, yesterday in Taipei.

"It should be remembered that the current second quarter recovery was expected back in 2002. There is a history of false starts in the tech sector, so we have to be careful," he said.

Bailey was in town to launch his company's annual report Asia High-technology Industry Review: Where is the Cycle Heading? His comments echo what Taiwan Semiconductor Manufacturing Co (TSMC, 台積電) chairman Morris Chang (張忠謀) said last week: "Some companies have done better than others ... I don't think you can call it a recovery, at least not yet."

The most recent false start occurred one year ago when Asia's manufacturers of made-to-order computer chips, or foundries, began using equipment and facilities that had been idle during an industry wide slump that started in 2001.

In the second quarter last year, industry leaders TSMC, United Microelectronics Corp (UMC, 聯電), and Singapore-based Chartered Semiconductor Manufacturing Co (特許) saw the proportion of total production capacity they actually use, known as the utilization rate, climb dramatically -- to over 85 percent in the case of TSMC.

But the peak was short-lived as demand did not follow the rise in output, and utilization rates slumped back to just 61 percent at TSMC by the end of last year.

"In 2002 we saw a false start as capacity utilization rates grew due to low inventories, but fell again very quickly," Bailey said. "We are back to the same place again this year. Things can melt and disappear again very quickly."

The tech sector has been banking on consumers and corporations replacing computers bought in 1999 ahead of possible Y2K bugs. But the replacement cycle has been delayed by a weak economy, as insecure end-users and firms squeeze more mileage out of their aging equipment.

"The strength of the overall economy is a critical factor for the pace of recovery," Bailey said.

"When the US economy picks up, companies will resume capital spending and you will start to see widespread adoption of next generation information technology [IT] equipment," he said.

Bailey predicted moderate growth for the second half of this year, and a recovery more likely next year.

Taiwan's flat-panel industry has also risen rapidly and has "a lot of potential and great sales growth," Bailey said, but there are risks with a sector that has to invest heavily in new equipment and factories.

Black spots in the industry are the dynamic random access memory (DRAM) market that has been on a rollercoaster ride for years.

"DRAM is a classic example of the volatility of the technology industry," said Tony Tsai (蔡東松), director of Standard & Poor's local arm, Taiwan Ratings Corp (中華信評).

"Chip prices go up, people get excited, throw money at pumping out more chips, demand is no longer there, and prices drop off," he said.

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