'Katrina Effect' Could Cost Chip Market Billions

A trade group explains the gloomy forecast: rising gas prices could mean the loss of significant discretionary income, in turn cutting down on chip-related purchases like consumer electronics.
SAN JOSE, Calif. — The Semiconductor Industry Association (SIA) on Thursday (September 8) warned that the “Katrina effect” could potentially cost the worldwide semiconductor industry nearly $25 billion in overall sales growth.

Recently, the SIA (San Jose, Calif.) said strong competition in the computer and mobile phone markets contributed to downward pressure on chip prices in July, adding that rising global oil prices could soon affect the chip market (see Sept. 1 story).

At a press event on Thursday, Doug Andrey, principal analyst with the SIA, expanded on the trade group’s assertions and painted a hypothetical — and gloomy — scenario based on the potential loss of discretionary income in the United States alone due to soaring gas prices and the aftermath of hurricane Katrina.

The average discretionary income in the United States is $2,745 per household, according to the SIA. Oil prices could take away $1,475 of discretionary income per average U.S. household, according to the trade group.

This, in turn, translates to a total potential loss of discretionary income in the United States alone of some $126.6 billion, according to the SIA analyst.

It also could translate into a total loss of $8.2 billion in terms of semiconductor sales for the United States. The total loss for the worldwide semiconductor industry could hit $23.4 billion, he said.

The SIA did not alter its overall chip forecast for 2005, but the trade group remains weary of the semiconductor climate. “There is a lot of uncertainty,” Andrey said.

Klaus-Dieter Rinnen, an analyst with Gartner Inc., said that the market research house has not changed its chip forecast for 2005, which calls for 7 percent growth this year over 2004.

But Rinnen did say that overall semiconductor demand could be “down to muted” in the wake of the recent events. “Katrina does give it more credibility to the down side,” he said at a press event.

Dan Hutcheson, president of VLSI Research Inc., presented another viewpoint, saying that there is no correlation between natural disasters and the impact on the semiconductor industry in terms of sales. “There has been a slowing effect [in the semiconductor industry] even before Katrina,” he said.

Indeed, beyond soaring prices of oil and other economic factors, the overall semiconductor market looks flat due to demand issues, said Bill McClean, president of IC Insights Inc. (Scottsdale, Ariz.).

The events are troubling for the fab-tool industry. In general, the chip-equipment market is expected to be flat-to-down, added Jeff Benzing, executive vice president and chief business officer for fab-tool vendor Novellus Systems Inc. (San Jose, Calif.). “There is nothing in the market to get excited about,” he said in a recent interview.

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