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Tuesday, 15 October, 2002, 07:39 GMT 08:39 UK
Tech woes swamp UK microchip star
Microchips
Times are hard for microchip makers

There is truly no escape from the latest recession in the technology sector, already touted as longest and deepest on record.

On Tuesday, the downturn left its mark on iconic British microchip design company ARM Holdings, slashing its previously healthy sales figures in half, and sending fresh ripples of alarm through tech sector investors.

That was never in the script.

ARM, which makes its money by licensing chipmakers such as Intel to manufacture its designs, was supposed to be immune from slumps in demand for physical components.

Chipmakers would continue to invest in ARM's cutting-edge designs even during downturns so as to stay ahead of the competition, guaranteeing the company a steady flow of business, the reasoning ran.

Bullet-proof?

That line of thought certainly convinced investors, who bid ARM's share price up to a peak of 10 in February 2000, catapulting the company into the elite ranks of the FTSE 100.

And for a long time it appeared as though the firm was indeed immune to the troubles afflicting its customers.


The industry built up masses of unsold stock, and it's taken a year and a half to chew through all that inventory

Andrew Norwood, Gartner Dataquest

ARM Holdings reported higher revenues throughout last year despite a record drop in global demand for microchips, eventually notching up 17 consecutive quarters of sales growth.

But the company's winning streak came to an abrupt end earlier this month, when it warned the financial markets that both sales and profits for the July to September period would come in sharply below expectations.

ARM shares lost two thirds of their value in a single day as investors digested the news that the company had finally succumbed to the downturn.

ARM saw its share price sink another 12%, to just 40.75p, when it confirmed the bad news on Tuesday.

Rock-bottom

Analysts blamed ARM's woes on the sheer depth of the slump in the microchip industry, saying many of the big chipmakers had reached a point where they had no option but to cut their precious research budgets.

Mobile phone
Mobile phone upgrades drive demand for microchips

It is certainly true that the microchip sector, though prone to cyclical overproduction and violent price swings, has never seen anything quite like this.

According to the US-based Semiconductor Industry Association (SIA), global sales of microchips fell by an unprecedented 32% last year as makers of personal computers and mobile phones cancelled orders in the face of flattening demand.

To make matters worse, the downturn in sales to end-users came just as new microchip factories, set up to feed apparently insatiable demand during the technology-led boom of the late 1990s, were coming on stream.

The result was a huge build-up of unsold stocks which dragged down prices and forced chipmakers to retrench savagely.

Ray of light

In the normal course of events, production cutbacks by manufacturers and gradual recovery in demand from mobile phone and PC makers would restore the market to equilibrium.


What that profit warning is telling you is that there is relatively little appetite for (ARM's) new chips

Keith Woolcock, Nomura

The SIA reckons a "sustainable and durable" recovery is already under way, pointing to a 2.2% rise in microchip sales between July and August.

But the big chipmakers are not out of the woods yet.

Industry leader Intel has pointedly refrained from calling an end to the downturn, while its closest rival Advanced Micro Devices earlier this month warned that it would undershoot its sales targets for the July to September period by as much as 18%.

"At some point, sales will begin to grow, but we haven't yet reached a stage where vendors are comfortable again," Andrew Norwood, senior analyst at Gartner Dataquest, told BBC News Online.

"The industry built up masses of stock, and it's taken a year and a half to chew through all that inventory."

Cautious outlook

The general consensus among producers and analysts is that sales should begin to pick up half-way through next year, although considerable uncertainty remains.

Sceptics point out that with consumers becoming increasingly reluctant to upgrade to the latest personal computers and mobile phones, the days of sustained double-digit growth in microchip sales may be over for good.

And while a recovery in microchip demand would certainly be good news for ARM, some analysts believe that the company's recent problems cannot be blamed solely on the tech sector downturn.

"The company is in no financial danger, and I accept that it has got a very strong market share," Nomura analyst Keith Woolcock told BBC News Online.

"But what happened in [the third quarter] is not a one-off. What that profit warning is telling you is that there is relatively little appetite for their new chips."

See also:

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