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Survey: Slower growth, volatile profits for chip makers

Sharon Gaudin | Jan. 3, 2008
An increased number of semiconductor vendors expect their revenue growth to slow, which could play a role in making profitability highly volatile in the chip industry over the next five years, according to a study released today by KPMG LLP.

An increased number of semiconductor vendors expect their revenue growth to slow, which could play a role in making profitability highly volatile in the chip industry over the next five years, according to a study released today by KPMG LLP.

KPMG, a New York-based audit, tax and advisory services firm that is a member of KPMG International, surveyed 94 executives from companies among the top 100 chip makers worldwide, with help from the Semiconductor Industry Association. The firm concluded that declining chip prices, competition from companies in emerging markets and rising research and development costs will sap the coffers of many chip makers in the years ahead.

"This is a warning of an overall slowdown in the semiconductor industry," Gary Matuszak, global chairman of KPMG's information, communications and entertainment practice, said in an interview. He added that the slowdown is being driven by a decrease in the price of chips across the board. "It's beyond any [price war] between Intel and AMD," Matuszak said. "There is a dramatic decrease in prices."

According to KPMG, all but one of the executives who were surveyed said that they expect their companies to increase revenue during the next fiscal year. But the percentage of the respondents who expect year-over-year growth of more than 10% was smaller than it was in a similar survey last year, KPMG said.

The study showed that when it comes to profitability, the outlook is even less robust. When asked to project financial results over the next five years, 33% of the surveyed executives said their profits will be flat; 15% said they will decline; and 26% said profit levels will be volatile and unpredictable. The remaining respondents said they think profits will rise at their companies.

"Executives are much less optimistic than they were a year ago," Matuszak said. "Corporate spending is going to be down, with the demand for new products coming from the consumer sector, which generally has a lower price point."

Matuszak added that most chip makers won't scrimp when it comes to research and development, which will further drain money from the profit pot. "I think R&D spending will most likely still go up," he said. "Companies realize they have to innovate to be successful."

Seventy-five percent of the executives surveyed by KPMG said they expect R&D spending to increase in the next fiscal year. However, that number is down from the 85% who responded similarly to the same question in last year's survey, Matuszak noted.

On Tuesday, Toshiba Corp. announced plans to expand its ongoing collaboration with an IBM-led research group that is working to develop 32-nanometer chip manufacturing technology.

Dan Olds, an analyst at Gabriel Consulting Group Inc., said after Toshiba's announcement that semiconductor companies are banding together to share weighty R&D costs. "It costs a lot of dough to be on the cutting edge, and it's risky," he said. "You can screw up your fast chips in a whole bunch of ways, and it can be hugely expensive to fix them -- not to mention the time lost."

 

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