A prolonged war in Iraq may derail a recovery in demand for semiconductors, hurting Asian manufacturers such as Hynix Semiconductor Inc and Chartered Semiconductor Manufacturing Ltd, analysts said.
Market researchers such as Gartner Inc have said chip sales may rise 9 percent this year, after rising 1.4 percent last year and falling 32 percent in 2001. A longer-than-expected war may depress demand among consumers and businesses for cellphones and computers, causing sales to miss their target, analysts said.
"The sentiment is not good," said Pedro Tai, who manages about US$40 million in Taipei for ABN Amro. "Expectations in the market have come down."
A coalition of forces from the US, UK and Australia attacked Iraq on March 19 to topple the government of President Saddam Hussein. US government officials said last week they've been surprised by the level of resistance from Iraq's forces.
US Defense Secretary Donald Rumsfeld has asked Congress for an additional US$62.6 billion to fight the war.
Developments in the war have dashed earlier optimism for a brief struggle, damping investors' enthusiasm for a rebound at technology companies. Prices of the most widely used computer-memory chips fell last week as personal-computer makers turned to existing stocks instead of new purchases amid concerns that a drawn out war in Iraq would hurt demand.
"We are still restricted by the Middle East tension," said Tan Kay Yang, a Gartner analyst in Singapore. "If it's a long war, we might be paralyzed by the impact and customer spending will be soured."
Unprofitable companies such as Chartered Semiconductor and Hynix Semiconductor stand to lose the most from a weaker rebound in chip demand because they continue to burn cash, analysts said.
Negative cash flow handicaps their ability to invest in new plants and equipment to keep pace with chip-industry developments.
For example, Intel Corp, the world's biggest chipmaker, over the past two years has invested more than US$12 billion in factories that use 12-inch wafers. The larger wafers cut production costs because more than twice as many chips fit on the dinner-plate-sized wafers than the 8-inch predecessors.
Moreover, the company in January said it will target 2003 spending "primarily" on 12-inch wafer production.
Similar spending may help Samsung Electronics Co, the world's largest memory-chip maker, beat out rivals Micron Technology Inc and Hynix Semiconductor.
"It will be more gloomy for the second-tier than it will be for the first-tier," Tai said. "For the second-tier, things may get bloody."
Investors may also end up footing the bill. Chartered Semiconductor, the world's third-biggest provider of made-to-order chips, said in mid-March it will have to raise more money to meet capital spending plans for 2004. Those plans may be scaled back if not warranted by demand, the company said.
Chartered Semiconductor, whose shares declined by about 10 percent in the quarter ended yesterday, has lost US$801 million over the last two years and has forecast a first-quarter loss of US$71 million to US$74 million, its ninth consecutive quarterly deficit.
Singapore-based Chartered Semiconductor so far hasn't seen any impact on its orders from the war, Chief Financial Officer George Thomas said. The company can only predict its business about one month in advance, he said.
"I don't think it has improved or gotten any worse," Thomas said in an interview. "Chartered will be gearing up and continuing to work with customers and doing what they need."
Hynix Semiconductor, the world's No. 3 maker of memory chips, has total debt of 6.2 trillion won (US$4.9 billion) and is being bailed out by creditors for the third time in two years. The company has lost about 9.5 billion won over the last three years.
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