 Okay,
everybody in the industry can breathe again. The chip industry looks
like it's on the way up after the worst slump in its history.
After a banner year for the chip
industry in 2000 (more than $200 billion in sales worldwide), the bottom
dropped out in 2001 -- and stayed dropped out through 2002 and much
of 2003.
By many measures,
the decline was the sharpest in the history of the industry: global
semiconductor sales plummeted to less than $160 billion in 2001 and
again in 2002. Weak sales for all kinds of electronics gear, from PCs
to cell phones to networking equipment, meant soft demand for the chips
that make them work. Particularly hard hit were makers of chips for
communications equipment and of DRAMs (dynamic random-access memories)
-- a key type of memory used in virtually all PCs and servers. Numbers
for 2003 were a little better: estimates peg the industry's revenue
for the year at about $180 billion.
Industry insiders suggest that
2004 will look much better than that. Volatile swings are nothing
new for the chip business, which has gone through boom-and-bust cycles
for decades. The integrated circuit (IC) was developed in 1958, concurrently
at Texas Instruments (TI) and Fairchild Semiconductor. Today, semiconductors
lie at the heart of ongoing advances across the electronics industry.
By far the largest chip company is Intel,
which makes about as much money from chips as its next three competitors
combined. Intel is
the
top maker of microprocessors -- the "brains" of PCs and other
computers -- and of flash memories, which are used for long-term memory
functions such as allowing cell phones to remember favorite numbers.
Advanced Micro Devices (AMD), while not among the top 20 largest chip
companies in the world, is nonetheless well-known as a perennial also-ran
to Intel -- it is a distant second in microprocessors, and has even
lost its #2 spot in flash memory. The legendary and bitter rivalry
between the two companies became even more intense in the past couple
of years when AMD finally began to make some inroads into Intel's seemingly
unassailable microprocessor market share. It gave back most of those
gains when Intel cut prices and stepped up its manufacturing schedule.
Even Intel knows that PCs won't fuel the chip industry forever, so
it has made forays into other areas, especially communications.
Outside
of its stronghold in microprocessors, Intel has plenty of company
from the other titans of the chip world: US rivals TI (a top maker
of analog
chips and digital signal processors) and Motorola (which is spinning
off its chip operations as a separate company); Asian giants
Toshiba, NEC, Renesas (formed from the chip operations of Hitachi and
Mitsubishi),
and Samsung Electronics (the world's top maker of memory chips);
and European kingpins STMicroelectronics, Infineon, and Philips.
Many
chip
makers, including some of these giants, have begun to outsource
more and more of their production. Cutting-edge chip production is
hugely
expensive, and building a new fab (chip fabrication plant)
has gone from pricey to prohibitive -- price tags run well into the
billions
-- for even some of the largest companies. Many chip makers,
including
big ones such as Broadcom and Xilinx, are completely "fabless" --
that is, they don't physically produce chips at all, focusing
their efforts instead on design and marketing. All of these
companies increasingly
rely on foundries, dedicated contract manufacturers whose focus
on the physical production of chips allows them to sustain
the massive
investments needed to keep up with the latest in manufacturing
technology. The field was pioneered by Taiwan Semiconductor,
and is dominated by
it and neighboring arch rival United Microelectronics. The
largest US-based foundry service belongs to none other than
IBM -- which is also a top
chip maker in its own right. As go the chip makers, so go their
suppliers.
The downturn for chip makers has been
even worse for chip equipment makers: while chip companies spent nearly
$50 billion on production
equipment in 2000, the radical slump cut worldwide expenditures
to less than $30 billion in 2001, and less than $20 billion in 2002.
Despite
the downturn, industry juggernaut Applied Materials has banked
on the next boom by continuing to pump money into development of cutting-edge
equipment. Applied and its rivals are pushing the performance
envelope
with gear that etches ever-tinier circuits (allowing more
features to be packed onto each chip), processes more advanced materials
(producing
chips that run faster, cooler, or with less energy consumption),
and handles larger wafers (lowering the cost of production per chip).
As
volatile as the chip industry is when considered as a whole,
it's marked even more by intense rivalries among individual companies.
There is
always pressure on chip makers to come up with something
better than what redefined the state of the art a few months, or
a few minutes,
ago. That pressure extends to chip equipment makers, foundries,
design labs, distributors -- everyone connected to the business of
bringing
chips from the minds of engineers into the high-tech gear
that runs your cell phone and your car's airbags and the PC or PDA
you're reading
this on. The result is an industry that steadily produces
gee-whiz technology while riding an oh-mercy business roller coaster.
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