Chip Industry To Suffer First Two-Year Revenue Decline

The semiconductor industry will suffer a second year of revenue decline in 2009, marking the first time chipmakers have seen sales drop in back-to-back years, a research firm said Tuesday.

The global economic downturn has hit the semiconductor industry hard by dramatically lowering demand for the chips that provide the computing power for PCs, smartphones, and other consumer electronics. As a result, revenue next year is expected to total just $219.2 billion, a 16.3% drop from this year, according to Gartner.

Gartner last week released preliminary results showing that chip revenue this year would fall 4.4% from 2007 to $261.9 billion. The latest estimates are considerably less than what Gartner had predicted in mid-November, which was a revenue increase of 0.2% this year and a 2.2% decline in 2009.

What has changed is a financial crisis that is having an "unprecedented negative impact on fourth-quarter sales and profits," Gartner said in a statement. The research firm expects sales in the fourth quarter of this year to show a record quarter-to-quarter decline of 24.4%, easily surpassing the previous record set in the second quarter of 2001, when revenue fell 20% because of the dot-com collapse.

Nevertheless, the semiconductor industry this time around has more tightly controlled inventory, which should help the market come back more quickly than in 2001, Gartner said. The industry is expected to bounce back in 2010 and 2011.

Revenue in 2010 is expected to increase 14.6% from 2009 to $251.2 billion. In 2011, revenue is expected to rise 9.4% from 2010 to $274.9 billion.

In the meantime, next year has its "wild card" in the market for DRAM memory chips, which are the system memory chips in PCs. While the DRAM industry has been in a downturn for 18 months, with losses approaching $12 billion, pricing is expected to firm in the second half of next year, which has "the potential to moderate the decline in 2009 semiconductor revenue," Gartner analyst Andrew Norwood said.