The semiconductor industry has been through so many ups and downs over the course of more than 60 years. If anyone should know how to get through the turmoil, it’s the chip makers who have become the elder statesmen of Silicon Valley.
But the greatest recession since 1929 is pulling the chip industry deeper into the [...]
But the greatest recession since 1929 is pulling the chip industry deeper into the mud than ever before. Sales fell 28 percent in January compared to a year ago. It’s getting ugly. Not quite auto industry ugly. But the wheels are coming off; the chip industry is expected to shrink in 2009 for the first time since 2001.
I shouldn’t be surprised, since the chip makers are stuck with capacity that is like an albatross around their necks. Chip makers are always vulnerable to economic swings that leave them holding the bag on a $2 billion factory with no orders to keep it busy. In such times, they hold their breath until they can come up for air, awaiting the inevitable economic upturn to lift their sales and fill their factories. The ones that survive are the ones who created war chests during good times.
No one in Taiwan wants to see a repeat of what happened to Qimonda, Germany’s big memory chip maker. Qimonda filed for bankruptcy in January, and it looks like many of Germany’s chip jobs will vanish. The DRAM chip makers may lose $5 billion to $6 billion as an industry in the fourth quarter, on sales of just $9 billion to $10 billion, according to Denali Software analyst Lane Mason.
The flash memory industry is just as bleak. SanDisk is hemorrhaging money, prompting a takeover bid from Samsung. But SanDisk is going it alone for now, and Samsung has dropped its bid. Last week, Spansion laid off 3,000 of its employees and gave them no severance pay. On Sunday, it filed for bankruptcy protection, but it also gave raises to retain key employees. The laid-off employees contend that Spansion broke the law by not giving them their 60-day notice.
Meanwhile, Advanced Micro Devices has enlisted the help of the government of Abu Dhabi in its fight against Intel. Since it has subsidies from the German government, AMD has the benefit of using two foreign governments to fight Intel. On top of that, a whole coalition of companies led by IBM are trying to build factories that can match Intel’s best manufacturing technology. I can’t say I pity Intel, which can afford to spend $7 billion on its own factories.
Nvidia and Intel, two partners joined at the hip, are in a hot war. Nvidia makes graphics chips, while Intel makes microprocessors. Both are necessary in the modern PC. But Intel sued Nvidia because it alleges it didn’t give Nvidia the right to make chip sets for the newest Intel-based computers, even after Nvidia granted Intel the right to make chip sets with Nvidia-based SLi machines.
Nvidia’s head of investor relations, Mike Hara, acknowledged that Nvidia may have to make its own x86-based (Intel compatible) microprocessor. And Intel is making its own graphics chip. That’s because we’re rapidly heading toward computers with just a single chip. Intel recently bad-mouthed Nvidia’ Ion platform, even though Ion is built to work with Intel’s Atom chip. What is really happening is that Intel and Nvidia have figured out there is only going to be one chair left in the game of musical chairs. There isn’t room for two. Is it ugly, bare-knuckle fighting? Yes, no surprise there.
I hesitate to think about what would happen if AMD goes under and Nvidia gets crushed. What will happen if the U.S. memory chip makers disappear, leaving the industry concentrated in the hands of two Korean companies and maybe some Japanese firms?
The danger is that this industry that has persisted for a long time with one structure is headed toward another. There have always been about 20 big companies and a flowering of startups with every innovation cycle. The startups have pretty much gone away, since it costs sometimes $100 million to get a promising chip company off the ground. And I worry that the 20 companies will go down to three, much like the auto industry. We’ll see more monopolies, more government-sanctioned cartels, and all of the economic chains that come with such structures.
The problem is that nobody is talking about this. The bailouts of homeowners and auto companies is taking precedence. We don’t have the attention span to think about the implications of losing a big chunk of the country’s electronics foundatio.
But we should. Once the companies founder and the jobs disappear, they don’t come back. In many key industries, we will be dependent on foreign suppliers. Don’t be surprised if we spend all of our energy saving the car industry, only to lose another, even more strategic business through our own neglect. I’m not asking for a chip industry bailout just yet. But we need to be aware of who else is circling the drain, besides the auto makers.
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