Europe's biggest chipmakers had record earnings in 2000, driven by mobile-phone and computer sales. This year, those same products are dragging them down.
Last week Royal Philips Electronics NV, the No. 3, said it may have its first annual loss since 1996 and STMicroelectronics NV, the largest, cut its forecast. Infineon Technologies AG, the No. 2, already said last month sales may fall this quarter.
It won't get better soon, analysts said. Slowing economic growth has spread to Europe from the US, prompting consumers to delay purchases of new cell phones and computers. Chipmakers' main customers such as Nokia Oyj meanwhile scaled back orders.
European semiconductor makers "are just starting to feel the slowdown," said Valerie Cazaban, who helps manage 180 million euros (US$156 million), including ST shares, at Paris-based brokerage Stratege Finance. "We're entering turbulent times."
ST on Thursday predicted second-quarter sales of between US$1.55 billion and US$1.6 billion, down from an earlier estimate of between US$1.65 billion and US$1.8 billion. That compares with US$1.88 billion in the year-earlier period. Philips said it sees no sign of a recovery in the chip market and predicted a 20 percent decline in global semiconductor sales this year.
Infineon, Europe's second-biggest maker and a unit of Siemens AG, said last month it doesn't exclude a sales drop because of falling memory-chip prices and weak mobile-phone. And Ulrich Schumacher told Frankfurter Allgemeine Zeitung last month that the chipmaker may lose money in the quarter through June.
"The outlook is very dim for semiconductor makers," said Renaud Pecher, who manages at Fortis Investment Management in Paris.
Infineon's woes also have an impact on parent Siemens, even as the Munich-based company gradually reduces its stake in the unit. In fiscal 2001, which ends in September, Siemens will probably still consolidate Infineon, Chief Executive Heinrich von Pierer said in a newspaper interview.
Market researcher Gartner Inc said worldwide mobile-phone sales in 2000 grew 46 percent to about 413 million units. Nokia, the largest cell-phone maker and one of ST's biggest customers, last week cut its profit forecast for this quarter and predicted "very modest" growth in global sales this year.
In Asia, chipmakers have also been hurting. United Microelectronics Corp (
US semiconductor makers are now faring better than their European and Asian counterparts. Texas Instruments Inc, the largest maker of chips for cell phones, two days ago reiterated its second-quarter earnings forecast. Intel Corp, the biggest computer chipmaker, surprised investors last week by saying second-quarter sales would be in line with estimates.
"In the US, the picture is clearing up somewhat," said Cazaban. European chipmakers "are not giving any indication about future performance, and that's very worrying."
Global chip sales will fall this year, after rising 33 percent last year, Gartner said in May. It sees a 17 percent drop in sales to US$188 billion, down from last year's US$226 billion.
"In the PC market the worst is probably over, and in the mobile phone market, the worst isn't too far from being over," said Pecher. "But no one knows when the rebound is going to take place -- in three, six or nine months. No one can say."
This year, ST shares have declined 20 percent, Philips dropped 28 percent and Infineon has fallen 7 percent. The Standard & Poor's Semiconductors Electronics index has fallen 14 percent.
The slowdown in Europe -- which started in September -- came as a surprise to many. In April, ST CEO Pasquale Pistorio predicted sales this quarter would be lower than last year, describing the slowdown as the "deepest and most abrupt" he'd witnessed in his 37 years in the industry.
That situation stands in sharp contrast with a year ago, when both Philips and ST reported a doubling in second-quarter profits as sales to makers of phones and digital cameras surged.
Both struggled to keep up with demand after a three-year slump in sales that ended in the late 1990s. Philips spent US$2 billion last year on equipment and plants to boost capacity, triple its 1999 investment.
This year, it expects to spend less than half that.
Geneva-based ST last month lowered its plans for capital spending for the second time this year and closed a plant in Canada. ST will spend US$1.5 billion on equipment this year, down from US$3.3 billion last year.
While cutting expenditures may help counter the drop in demand, other factors are also at play.
"As we go into 2002, it will all depend on how the economy ticks up," said Andrew Norwood, a semiconductor analyst at Dataquest.
"That's not in the power of semiconductor makers to influence. All they can do is sit back and wait."
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