Semiconductor firms in the chips again?

The recession has forced electronic component makers to navigate the economy with the same aggressive flair drivers use negotiating hairpin turns on a treacherous race track. Now semiconductor producers think they see a smoother, faster road ahead.

''Our action in the recession reminds me of race driver Sterling Moss,'' Leslie L. Vadasz, senior vice-president of Intel Corporation, says. ''Moss said that when there is a crash ahead, I step on the gas, because most others step on the brake. That is what Intel did in 1981 and continues to do today.''

Until the recession, the company was speeding around the semiconductor industry like a high-powered Porsche. It introduced the first microprocessor, or computer on a chip, in 1971 and saw profits rocket from $3 million in 1972 to almost $97 million in 1980. The industry as a whole saw sales jump from $4.6 billion in 1973 to $14 billion in 1981.

Then the recession hit and the industry found itself able to produce far more chips than customers wanted. As a result prices plummeted. For example, the price of a chip that holds more than 16,000 bits of memory (known as 16K) fell from $20 to $5 in less than a year. A sea of red ink threatened to overwhelm industry income statements.

Intel reacted to a 72 percent plunge in its 1981 profits by investing record amounts both in new equipment and in research. White-collar staff was asked to work 10 additional hours a week for no extra pay. And new product introductions were speeded up. In fact, by the end of 1982, 60 percent of Intel's sales will come from products introduced since 1981.

The strategy seems to be paying off. In the first three months of 1982, Intel's unit sales climbed 40 percent and profits climbed 155 percent from depressed levels a year earlier. The order pattern ''smells right. I certainly hope it will hold,'' Mr. Vadasz said.

It is a hope shared by the rest of the semiconductor industry. A turnaround of varying proportions is evident at the host of companies in California's Silicon Valley. Their products, which are made out of silicon wafers, provide computing power and ''memory'' to more than 100,000 products from automobiles to video games.

''The big news is that from December through March, [semiconductor industry] orders increased at least 50 percent on a month-to-month basis,'' says Michael A. Gumport, an analyst at Cyrus J. Lawrence Inc.

For example, at Advanced Micro Devices (a leader in high-performance chips), ''We expect to have (in the current quarter) the highest sales level ever. . . . I now believe AMD can resume its 30 percent per annum growth (in sales) this year,'' president Walter J. Sanders says.

The pickup in semiconductor orders can be traced to three areas, Vincent J. Glinski, an analyst at Drexel Burnham Lambert, says. Electronic distributors are buying more, as are personal computer manufacturers. And the giant International Business Machines has also stepped up buying as it prepares to launch a new line of computers next year.

Not all semiconductor customers have come roaring back into the market, however. ''The industrial automation and (mainframe) computer market is relatively flat,'' says Ray Stata, president of Analog Devices Inc., another chip manufacturer. Sales to auto and appliance makers are also slow.

And some buyers are restocking depleted inventories, so sales could drop if the economy does not pick up. ''The question is . . . when do the major players come back in the game? (Chip makers) are making a bet that in the fourth quarter the mainframe companies will start to order. It is a reasonable bet,'' says John M. Geraghty, an analyst at Dean Witter Reynolds Inc.

''Now all we have to do is get through the next four months or so,'' quips Irwin Federman, president of Monolithic Memories Inc. Messrs. Federman, Stata, and Sanders spoke at a recent conference on technology sponsored by the San Francisco-based investment banking firm of Hambrecht & Quist.

Selling chips is only half the battle for semiconductor makers. The other hurdle is to sell at a price that allows a profit. The industry has continually driven the price of computing down as more and more circuits are squeezed onto a fingernail-size chip.

As Japanese manufacturers made a bid for the memory products business, ''the rate of growth in worldwide capacity grew faster than the demand. As a result, prices eroded very rapidly,'' said Mr. Vadasz at Intel.

Recently, Japan has not increased its shipments to the United States, analysts say. The industry-watchers say this is either a bid to prop up prices or reduce protectionist sentiment in the US. ''They may have said we (the Japanese) have a pretty good share of the market, why not make some money,'' Mr. Geraghty at Dean Witter.

As a result, prices have firmed. Prices on 16K RAM (random-access memory) chips have moved from 78 cents each to $1.20 in the last four months, according to Cyrus Lawrence's Mr. Gumport.And another analyst notes that 64K RAM chips now fetch $6, up from as low as $3 last year. ''Semiconductor prices have stopped going down so fast and may be flat,'' Mr. Gumport said.

In the long run, semiconductor prices will continue to fall. So managers are renewing efforts to boost profit margins by trimming costs and improving efficiency. For example, Texas Instruments Inc. recently restructured its semiconductor operations to boost effectiveness. Its move came on top of layoffs. Meanwhile, Intel is expanding its administrative productivty campaign, which in 2 1/2 years has saved $6 million.

Of course, innovation remains the key to success in the chip business. ''You cannot save yourself into prosperity, you need new products,'' Mr. Vadasz notes. His company plans to introduce some 125 new products in 1982.

The industry's stress on new products is likely to expand the market for semiconductors. Hambrecht & Quist partner Clifford H. Higgerson notes that ''the microelectronic revolution is going to continue to provide cheaper and cheaper computing power . . . there will be a dramatic explosion in the market, based on cheaper costs, allowing many companies to develop new businesses.''

Worldwide electronic component sales (In billions of dollars) 1973 4.675 1974 5.000 1975 4.025 1976 5.675 1977 6.475 1978 8.375 1979 10.700 1980 14.025 1981 14.000 (est.) 1982 15.700 (est.) Source: Cyrus J. Lawrence Inc.

You've read  of  free articles. Subscribe to continue.
QR Code to Semiconductor firms in the chips again?
Read this article in
QR Code to Subscription page
Start your subscription today