Year-end look at the semiconductor industry

What a difference six months can make!

Just six months ago, business conditions for the semiconductor industry were not so bad, other than the train wreck that is the memory device market. Then, the credit crisis and the global financial meltdown accelerated in the fall, and things went south for nearly everyone, and not just for the presidential candidacy of Senator John McCain.

Semiconductor manufacturers by the bushel started cutting their financial guidance, and soon after started cutting their workforces. (I was pleased and surprised this month when Actel didn’t reduce or revise its Q4 guidance, one of the few chip makers to do so of late.) Suppliers of semiconductor fabrication equipment and materials were laying people off from the outset of 2008, and some resorted to second and third rounds of layoffs during the year.

Some companies began 2008 in trouble, and the year only compounded their woes.

AMD continued to hemorrhage red ink and Hector Ruiz predictably lost his job as CEO of the No. 2 microprocessor manufacturer. The chip maker went through two rounds of workforce reductions, trimming 13% of its headcount. The company is making a bold yet possibly troublesome move in spinning off its manufacturing operations into a venture that will be financially controlled by the sheiks of Abu Dhabi. The Committee on Foreign Investment in the United States (CFIUS), an interagency panel of the federal government that vets business deals for their national security implications, has to sign off on this deal.

Companies that make DRAMs and flash memory devices were on shaky ground in 2007, due to global oversupply in the market and plummeting prices for product. Things didn’t get any better in 2008, and the consequences are coming due. Micron Technology started losing money in early 2007 and decided in late 2008 to cut about 15% of the workforce in its memory operations over a two-year period. Hynix Semiconductor closed a wafer fabrication plant in Oregon during 2008 and shuttered older fabs in China and South Korea, as well. Hynix and Samsung Electronics were initiating temporary plant shutdowns and other cost-cutting measures by the end of 2008.

The memory chip maker in the deepest trouble is Qimonda, the spin-off of Infineon Technologies. The company laid off thousands of workers and made other cutbacks during the year. It enters 2009 as a likely candidate for acquisition or liquidation.

The Semiconductor Industry Association forecasts the worldwide semiconductor market will decline in 2009, something not seen since 2001. It says the industry grew only 2.2% in 2008, to $261.2 billion, and sales will fall 5.6% next year, to $246.7 billion, before growing again in 2010.

For all the trouble in 2008, consolidation was inevitable and unrelenting. ON Semiconductor was an aggressive buyer, completing its acquisition of AMIS Holdings (AMI Semiconductor) and purchasing Catalyst Semiconductor during the year. ON Semi joined Microchip Technology in making an unsolicited takeover bid for Atmel, which Atmel rejected. The two companies later dropped their bid, although Microchip threatens a proxy contest in 2009.

Hostile takeover offers emerged elsewhere in the industry — Samsung Electronics for SanDisk, Vishay Intertechnology for International Rectifier. Both bids were unsuccessful, however.

What does 2009 hold for the semiconductor industry? More of the same kind of trouble in the first half, it seems clear. The fate of the second half hangs on what becomes of the current recession, one year old and counting.