Silicon chip market comes back to earth

December 1, 2000
Web posted at: 7:07 PM HKT (1107 GMT)

In this story: Expectations lower Deceleration ahead RELATED STORIES, SITES

By Nic Hopkins
CNN Interactive Writer

Hong Kong (CNN) -- The realization is dawning on investors that makers of silicon chips, once the high-flyers of the technology sector, might never be valued the same way again.

Analysts believe the recent turbulence in the tech sector has as much to do with falling confidence in Internet companies as a maturation of the microprocessor market, despite the seemingly endless array of devices that now function using microchips .

In the U.S., some microchip companies have become omnipresent, turning brands like Intel and Motorola into industry icons.

In Asia, this kind of success has been matched by companies such as Korea's Samsung Electronics, the world's largest computer chip maker, as well as Taiwan's United Microelectronics and Taiwan Semiconductor Manufacturing Co, and Chartered Semiconductor Manufacturing in Singapore.

Yet those companies, and many more, have seen their shares decline sharply in the past few months.

Paul Shanin, an equity strategist at HSBC in Hong Kong, says: "We've seen industry research groups describing the PC industry as starting to get mature. I think it could be quite serious."

That means the steep quarter-on-quarter growth of the previous decade could be receding, leaving microchip makers in the same position as manufacturers or more "ordinary" consumer products.

"They could be just like companies that make TVs," says Shanin. "That doesn't mean anything bad necessarily, they can maintain a strong profit, just not with the growth expectations of before."

To investors the world over who have spent money on shares in chip makers, hoping to ride on a wave of profits as chips get faster and more powerful, that's bad news. Last month, they responded the only way they know how - by selling.

Confidence has also been damaged by the recall of a faulty batch of revolutionary Crusoe chips made by Transmeta and doubts over the performance of the latest generation of Pentium chips made by Intel.

This week, the Philadelphia Stock Exchange Semiconductor Index, which international investors track to gauge the performance of global chip makers, shed 20 percent in four days, the biggest decline since April 14.

Through November the technology-rich Nasdaq Composite Index in the U.S. endured its worst month since the share market crash in October 1987, ending 23 per cent weaker after a 4 percent plunge on November 30.

That has seen Asian high technology stocks, particularly chip makers in Taiwan, Korea and Japan, fall back as well, although not by as much as the U.S. market. "This is a Nasdaq phenomenon, which in these markets is reflected in North Asian markets," Shanin says.

But the impact on Asian markets has been milder than expected, with some analysts saying local markets have less to fall because they never reached the heights of their U.S. equivalent.

On Friday, in response to the Nasdaq's steep plunge in the U.S. on Thursday, Asian computer and chip stocks fell even though many markets remained in positive territory.

"Asian tech markets have already fallen pretty heavily in the past few months, so they don't need to respond as much to the U.S. slowdown," says Singapore-based Goldman Sachs equities analyst Anand Aithal.

Aithal predicts it could be as much as a year before some life returns to Asian tech stocks.

"They key is to quantify the extent of the U.S. slowdown. We need to know whether we are talking about a deceleration in demand for Asian products or a decline. So far I think we're talking about a deceleration, and I think that has been factored in already," he says.

Shanin adds that the situation isn't all bad for chip makers, which recorded their second best ever month of production worldwide in September. "The problem, if there is a problem, is that underlying demand seems to be contracting," he says.

Meanwhile, other factors are having a bigger impact than the outlook for microchip makers.

In Korea, an economic slowdown is causing stronger concerns over corporate profitability while in Hong Kong, uncertainty over the outlook for mobile phone companies operating in mainland China has had a similar impact.

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