Chip Slump Worsening--Or Is It?Chip Slump Worsening--Or Is It?

Talk about your conflicted industries. On Monday alone, the Semiconductor Industry Association reported that chip sales in May fell more than 7% from the previous month, Intel released the latest incarnations of its Pentium 4 line, and German chipmaker Infineon Technologies AG issued $1.4 billion worth of stock to help fund capital expenditures and repay short-term debt. That translates into a single day in which the industry indicated that sales are sluggish, there's a market for new chip technology, and that investors--at least those in Germany--are eager to snatch up shares of a chip stock. So which is it?

The answer could be, "all of the above." SIA says the current downturn is the industry's worst in nearly two decades, and Intel is confident that there's always demand for faster processing power. And while Infineon officials couldn't be reached for comment, a key analyst acknowledges there's a slowdown but supports companies taking actions to ensure long-term strength, including raising capital. "Everybody knows this is somewhat cyclical," says Creative Strategies analyst Tim Bajarin.

An SIA spokeswoman says the current industry slump--in which chip sales have dropped 20.1% worldwide in the past year--is the worst the association has seen since the prolonged downturn that ended in 1985 when the PC revolution took off. But she says that whereas it took a fundamental change in computing to reverse that downturn, the current woes are thought to be more closely tied with excess inventory. As that inventory has eroded, the association is hopeful a turnaround will begin by the end of the year. Intel, for one, isn't letting the slump alter its plans. It released 1.6-GHz and 1.8-GHz Pentium 4 chips Monday in an effort to offer distributors more performance price points. "We're not going to hold up technology," says an Intel spokesman of the downturn.

Bajarin says the impending release of Microsoft's Windows XP and the growing popularity of handheld devices are among the reasons he's optimistic about the chip industry's future. He says there's no reason to expect something as significant as the PC revolution to bring an end to the downturn, but he also maintains that the digital revolution could prove nearly as important to the chip industry. Says Bajarin, "The move to take stuff from analog to digital has hardly begun."