December 2007 Archive
If anything has prepared semiconductor manufacturers for the market challenges of 2008, it was the year just past.
To paraphrase Dickens, 2007 was the best of times for some chip makers and the worst of times for others. Wireless communications was a double-edged sword, as market forces whipsawed the handset makers. It was a good year if you were a supplier to Nokia and a bad year if Motorola was your biggest customer. Suppliers of DRAMs and NAND flash memory devices got price beat-downs throughout 2007, and some NAND flash vendors got subpoenas on pricing practices from antitrust regulators in Canada and the US.
Advanced Micro Devices had an annus horribilis maximus. The company lost hard-fought market share to Intel during 2007, posted a net loss of $1.6B for the first nine months of the year, laid off 430 employees to cut costs, trimmed its 2007 capital spending budget by 20%, and missed deliveries of its quad-core “Barcelona” processors due to a design glitch. It also said it would take a big charge against earnings writing off goodwill from its $5.4B acquisition of ATI Technologies in 2006. By the end of the year, AMD CEO Hector Ruiz was giving interviews saying that no, he was not going to quit in 2008 – meaning the board will likely force him to resign in 2008. Unless things turn around dramatically. And they could.
Sony and Toshiba had outstanding increases in semiconductor sales for 2007 (up 57% and 24%, respectively), mostly related to increased sales for the PlayStation 3 game console, according to the iSuppli market research firm. Hynix Semiconductor put together an excellent year, too, with a 22% boost; freed from its non-compete agreement with spinoff MagnaChip Semiconductor, Hynix will be expanding into new chip markets in 2008, starting with CMOS image sensors. QUALCOMM, despite its legal travails with Broadcom and Nokia, increased chip sales by 24% in 2007, iSuppli estimated.
For all the pains and gains, M&A activity in the industry was brisk throughout the year. LSI Logic swallowed Agere Systems and changed its name to LSI Corporation. Deals pending at the end of 2007 include ON Semiconductor’s purchase of AMIS Holdings (AMI Semiconductor) and STMicroelectronics’ acquisition of Genesis Microchip. Intel and ST delayed the spinoff of their long-awaited flash memory JV, Numonyx, into the New Year.
2008 will continue to show how consumer electronics drives the semiconductor industry. For all the chatter about the Apple iPhone – Is it or isn’t it a smart phone? Is it really the “god phone” people want? – the iPhone galvanized the wireless handset market in 2007. Nintendo’s Wii console showed how gaming isn’t just for kids and overgrown adolescents. The semiconductor industry stands with its finger in the wind, waiting to see where the breezes will blow in 2008.
While it’s still too soon after Christmas to declare this holiday shopping season a flop, it’s not looking good for many of the nation’s major retailers. With the caveat that some 16% of holiday retail sales occur the week after Christmas, which may still boost the fortunes of some laggards, it’s pretty evident who the winners and losers are this year.
An informal survey of the origin of the gifts under my family’s Christmas tree supports what retail analysts have been predicting: department stores and women’s apparel shops trailed other retail formats, such as consumer electronics chains and online retailers. Not a single present under our tree was purchased from a department store. That’s bad news for struggling chains like Macy’s, Dillard’s, and JC Penney. Macy’s CEO Terry Lundgren, who pulled out all the stops this season keeping the doors of some Macy’s East stores open around the clock, may find that investors are growing impatient waiting for him to reinvent the American department store. With the exception of a single $40 cashmere sweater purchased on sale at Old Navy, there was no women’s apparel at all under our tree. Indeed, women’s clothing was a particular sore spot this season dropping nearly 2.5%.
One big bad surprise this season is the weak performance of the nation’s #2 discount chain Target, which has revised its December estimate for same store sales to be -1% to 1% (down from a previously expected range of 3% to 5%). Lulled by Target’s historically steady, strong performance and apparent immunity from the effects of high gas prices, which have vexed archrival Wal-Mart, Target was expected to have a good, but not great, holiday selling season. But it certainly hasn’t turned out that way. Speaking from personal experience I found shopping – particularly toy shopping – at Target frustrating this year. After coming up empty following trips to two Target stores in search of Polly Pocket’s Race to the Mall for my nine year old, I found the elusive item at the first Toys “R” Us store I visited. In turn around mode after years of pummeling from discount chains, including Wal-Mart and Target, Toys “R” Us appears to finally have gotten its retail act together with well-stocked, easy-to-navigate stores and brisk check out lines. We’ll have to wait until January for the numbers, but for now kudos to CEO Jerry Storch (formerly of Target) for visible improvements at the nation’s largest toy retailer.
Other goodies under our tree included an iPod and Bose docking station, both from Best Buy, which impressed me with its efficient – but not overpowering – customer service. (NOT the case at rival Circuit City!) Judging from the bustle at Best Buy, where we also purchased one of this year’s “must have” digital picture frames, I’ll bet the chain had a very merry Christmas.
Too bad the joy wasn’t shared by all.
With gas pump prices sitting at $3 or more a gallon, a question keeps coming up. Why aren’t there more refineries in the US?
According to the Energy Information Administration, the US had more than 300 operating refineries in the early 1980s. By 2007 the number of refineries in the US had been cut in half (down to 149). From 1975 to 2000, the US Environmental Protection Agency received only one permit request for a new refinery. A new refinery has not been built in the US since 1976.
Why the dearth of activity? The answer is about as divisive as other hot-button political issues in this election season — the Iraq War, gun control, abortion, illegal immigration, and the national budget. In one corner, the oil companies and their free market supporters bewail the myriad environmental regulations that make the costs of building new refineries or expanding older ones onerous. The demands of the Clean Air Act and the 50 separate gasoline blends required by the Federal and State governments to meet various air pollution reduction schemes have meant refits of many aging refineries are too cost-prohibitive for many companies. Oil companies have chosen to close inefficient, highly-polluting refineries in favor of expanding the capacity of fewer, more cost-efficient ones. A nationwide NIMBY (not in my back yard) mood — would you want a new refinery in your neighborhood? — has also crimped plans for new refineries.
In the other corner, environmentalists and consumer advocates point to greedy corporate entities that have intentionally reduced the number of refineries, and deliberately built no new ones. Through industry consolidation, a few major acquisitive companies have limited competition and reduced refining output, which in turn has jacked up prices at the pump, bringing misery to the motoring masses and megabuck profits to the oil companies.
According to Public Citizen, the largest five oil refiners in the US (Exxon Mobil, ConocoPhillips, BP, Valero Energy, and Royal Dutch Shell) control more than 56% of US oil refinery capacity; the top 10 refiners control 83%. According to CorpWatch, because of upgrading and expansion operations, refining capacity during the last 30 years has shrunk only 10% from its peak of 18.6 million barrels a day. At the same time, gasoline consumption has risen by more than 45%. The American Petroleum Institute, which represents oil and gas companies, would beg to differ with most of the above statistics and their causes.
Whatever side you come down on in this debate, the good news is that there is a renewed spate of activity going on in the refining sector. Here are three recent events:
- On December 10, US Energy Secretary Samuel Bodman praised the planned $7 billion expansion of a Motiva Enterprises oil refinery in Port Arthur, Texas. Motiva, a joint venture between Royal Dutch Shell and Saudi Aramco, is doubling the size of the refinery’s capacity to 600,000 barrels per day. Expected to be completed by 2010, the facility will become the largest oil refinery in the nation.
- On December 11 it was reported that Valero was considering an overhaul of its refinery portfolio, focusing on 10 refineries that process oil more cheaply and divesting its others. In making this move Valero was following the lead of integrated oil companies such as Royal Dutch Shell and ConocoPhillips in reducing their refining capacity. Valero is looking to focus on big refineries (on the East Coast, the West Coast, and the Gulf of Mexico) that have greater access to oil and are capable of processing oil that is tougher to refine and therefore cheaper to purchase.
- While major refiners are considering increasing production by up to 2 million barrels a day by 2010, perhaps Exxon Mobil has a model for the future of refineries with its plan for a floating refinery. The company has announced plans for a $1 billion floating liquid natural gas refinery 20 miles off of New Jersey’s coast. The project, due to open by 2015, would supply natural gas to about 5 million residential customers in New York and New Jersey. A key selling point — the plant will not be visible from the shoreline. Maybe ”out of sight, out of mind” gives the US refining industry, enviromentalists, and disgruntled neighbors a common way forward.
Year-end lists, is there anything they can’t do? They dish out convenient bite-site morsels of information, provide periodicals with easy copy around the holidays, and help bloggers like me on a deadline before vacation. Sure, they’re not necessarily news, but they’re usually good conversation (or debate) fodder.
One of the most anxiously awaited lists around the Hoover’s compound is Fortune magazine’s annual compendium of the 101 Dumbest Moments in Business. Topping this year’s dishonor roll is China, which I’ve always considered to be more a sovereign nation than a moment. But when you consider that the country gave us lead-laden toys, tainted toothpaste, and killer drugs all in one calendar year, it’s easy to see Fortune’s rationale, if not choice of words.
Also near the top of the slate are usual suspects Stanley O’Neal and Merrill Lynch (#5 and #4, respectively) and Chuck Prince and Citigroup (#6), after the companies formerly run by those men were compelled to write down billions of mortgage-related investments between them.
No surprises there, but further down is when the list gets good. At #13 is Disneyland’s decision to close the “It’s a Small World” ride for renovations because its boats were getting stuck under the weight of overweight passengers. And how does the Magic Kingdom compensate park-goers whom the ride cannot accommodate? With free food coupons, of course. That just seems cruel.
Speaking of cruel, the Humane Society discovered that the faux fur used to make some of the jackets in rapper Jay-Z’s Rocawear line was actually dog hair (#32). Then there’s the guy who worked at a screw factory in Germany and stole thousands of the buggers each night (#49). Eventually compiling over a million, which he then sold online at below cost, artificially deflating the screw market. There’s a joke in there somewhere but I ain’t touching it.
But perhaps the most inane of all is one that didn’t make Fortune’s cut: the cost of the 12 Days of Christmas. According to PNC Financial, all those pipers piping and a partridge in a pear tree will run you around $19,500, the highest total ever, thanks in part to the spike in golden ring prices and 2007’s minimum wage increase, used to determine the cost of the only unskilled labor mentioned in the song, the maids a-milking.
Sounds like a great deal, doesn’t it? There are quite a few companies out there marketing such genetic tests, offering gullible customers a profile of their health risks for a modest fee. According to experts, however, these tests are being marketed prematurely, and the technology is too new to allow for such widespread and easy usage.
Instead of helping, some doctors fear that the results of these tests could have an adverse effect on patients, giving them unwarranted reasons to worry, or not worry, about their health. Companies such as 23andMe and deCODE are offering personalized tests analyzing a single gene or limited group of genes, and the tests are often based on scientific studies that have not been validated through replication. But genomics expert J. Craig Ventner believes that it will takes thousands of DNA samples monitored over decades to accurately predict medical outcomes.
Many pharmaceutical companies are working to link gene mapping technology to new drug developments, but progress has been slow. Companies such as Novartis, GlaxoSmithKline, and Intercell are working on vaccines based on genomics of bacteria. Drugs based on human genomics, however, are proving more difficult to develop, which is unfortunate for pharma giants desperate for a new blockbuster product.
Many scientific studies are forming the basis for future diagnosis and treatment techniques, and companies like U.S. Genomics and other parties are working to make genetic mapping cheaper and faster so that its applications can be magnified. Companies are working together to bring the technology to market for widespread applications — for example a consortium including Pfizer, J&J, and Wyeth is looking into how genetics impact the adverse side effects of certain drugs.
Sure, it would be great to know if I’ll ever develop cancer or have a heart attack, but from what I gather, purchasing a cheap and easy DNA test over the internet would be pretty useless at this point. If drug development firms are still trying to figure out how to link genetic predisposition for an illness to an actual treatment, having that information accurately and usefully available to individual consumers is probably a ways off as well.