The chips are down and falling further

The world chip sector shrunk in 2008 - for just the fifth time in 25 years - and is forecast to further contract in 2009.

Semiconductor industry revenues for 2008 are expected to decline 4.4% to $261.9 billion, according to research firm Gartner. The industry makes memory and processor chips for computers, mobile phones and industrial and military devices.

"In the last quarter of 2008, market conditions deteriorated significantly, and as the fourth quarter has progressed, many vendors have issued updated guidance for the quarter, reflecting weakening market conditions," said Andrew Norwood, Gartner research vice president.

"Unfortunately for vendors, 2009 is going to be considerably worse."

Korean-based Hynix Semiconductor suffered the steepest fall among the top ten chip vendors, with sales sliding 30% thanks to the decline in DRAM and NAND prices. Infineon Technologies contracted 21%, largely because of its DRAM subsidiary Qimonda and a boardroom coup that ousted its CEO.

Unlike the dotcom collapse in the early 2000s, the current downturn "is much more broad-based and not limited primarily to the technology sector," Norwood said. Chip firms should focus on "cash preservation and inventory management," he advised.

"While gross margin for IDMs (integrated device manufacturers) will show significant declines owing to underutilized factories, focusing on inventory now should help the recovery when demand returns. This is also an excellent opportunity for the larger companies with stronger balance sheets to make strategic acquisitions."

For the 17th consecutive year, Intel was the world's biggest semiconductor firm. Taking into account the sale of its flash memory business, it boosted revenue by 6.5%. Qualcomm's sales grew 15%, the fastest in the industry.

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