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Semiconductors Show Suprising Signs Of Slump

November 14, 1988

NEW YORK (AP) _ The U.S. semiconductor industry is feeling the chill breeze of a slowdown for the first time since the disastrous collapse of 1985 and 1986.

Only recently the industry seemed, with record sales and profits. But three events last week illustrated that setbacks occur quickly in the volatile business:

-A key measure of the chip industry’s health, the book-to-bill ratio, fell to 0.92, its lowest point since November 1985. A reading below 1.00 often signals a slump.

-Surprising analysts, National Semiconductor Corp. said it expects to report a ″significant″ operating loss for its fiscal quarter ending Nov. 27.

-Advanced Micro Devices Inc. said it will lay off as many as 1,000 U.S. workers, or 7 percent of its work force.

The good news is few industry watchers expect the coming slowdown to be as severe as the one in 1985-86, when American chip makers lost $500 million and Silicon Valley lost more than 17,000 electronics jobs.

The mid-decade depression in the chip business stemmed from vast overproduction, which led to accumulation of excess inventories that took nearly two years to work off.

Chip makers, distributors and users are monitoring inventories much more closely this time to prevent them from getting too high, analysts say.

″No way are we going to have that kind of inventory cycle that led to the last crash,″ said Elizabeth Baatz, an economist for Cahners Publishing Co. in Newton, Mass.

Ms. Baatz is forecasting a decline of about 3 percent next year in sales to the North American market by the world’s chip makers.

Other sources are more optimistic. U.S. sales of semiconductors should rise 12 percent next year, according to a poll of chip makers released in September by World Semiconductor Trade Statistics.

But even a 12 percent increase would be far from the 30 percent growth the industry is experiencing this year.

The chip business does not tolerate slow growth as well as other industries because it needs good sales to recoup the enormous cost of building state-of- the-art fabrication plants.

The last industry recession drove some companies out of business, and even a mild softening this time would hurt the ability of U.S. chip makers to research, develop and invest for the future. In contrast to the Japanese giants, most American chip makers lack other lines of business to carry them over the rough spots.

″It’s very tough if you’re not prepared to deal with it,″ said Larry Borgman, an analyst in New York for Nomura Securities International Inc.

The biggest factor in the slowdown is a softening of sales of personal computers, mainly the less expensive models, analysts say.

Companies such as Advanced Micro that sell heavily to personal computer makers are among the first to be hurt. Also, AMD lags in switching over to CMOS technology, which is for chips that consume less power.

But Advanced Micro insists it will not be the only company to suffer. ″We just fell out of bed first,″ said Michael Kubiak, the head of investor relations for the Sunnyvale, Calif.-based company.

Texas Instruments Inc. and Micron Technology Inc. still are enjoying the benefits of a shortage of production capacity for DRAMs, or dynamic random access memories. They are the only U.S.-based companies that sell those chips to the open market.

But Japanese companies, which control 90 percent of the world DRAM market, are spending heavily on new capacity. Sometime next year the increased production will cause DRAM prices to fall, probably steeply, analysts say.

Intel Corp. and Motorola Inc. are in a better position to withstand a softer market, according to Millard Phelps, an analyst for Hambrecht & Quist in San Francisco.

Intel, in particular, is the only producer of the 80386 microprocessor that goes into fast, expensive and hot-selling personal computers from International Business Machines Corp., Compaq Computer Corp. and others. Intel has been unwilling to license the microprocessor to other manufacturers except IBM, which so far has shown no interest in making the chip.

Finally, some specialty chip makers such as Cypress Semiconductor Corp., Xicor, LSI Logic Corp. and VLSI Technology Inc. have products that are in demand and should stay that way for awhile, analysts say.

″We are at the end of the semiconductor (business) cycle, to be sure,″ Phelps said. ″But we’re painting the entire industry with the same brush. There are definite differences. Those differences are the place to focus today.″

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