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Sunday, October 24, 2004

Tough Time For Technology Via NYTimes

The NYTimes has published a good article about the state of the semiconductor industry and the challenges faced by them.Mr. Morris Chang speaks of the future of the chip business, he sounds somber. Like many global executives, perhaps his biggest long-run worry can be traced to China's rising industrial power. His immediate concern, however, is more basic."We're all going to see lower growth in the next 10 years," he said from his spartan office. Next year "will not be a very high-growth year, but it will be a positive year; beyond that I'm pessimistic."Investors seem to agree. After a yearlong boom in chip sales, orders have slowed since early summer. In recent weeks, many analysts have cut their projections for the fourth quarter and beyond, citing the damping effect of high oil prices and bulging inventories. Mr. Chang sees this looming downturn not simply as the latest plunge in the semiconductor industry's typical roller coaster progress, but as a more fundamental reordering of the business. Lower growth but greater outsourcing, rising competition from China and the spiraling cost of staying at the technological forefront, he says, are impelling industry leaders to reconsider their approach to the business. TSMC churns out chips with nodes 130 nanometers across, the smallest scale widely on offer, and is moving, not far behind the pacesetters, to production at 90 nanometers and ultimately even narrower. Mark Edelstone, a semiconductor industry analyst with Morgan Stanley, says, "We are in a new phase of lower growth, but the bigger factor is the trend towards outsourcing, which is going to accelerate."He estimated that about a fifth of the $210 billion semiconductor industry is outsourced to contractors like TSMC. By the end of the decade, he predicted, nearly a third of what should then be a $350 billion industry will be made by contract manufacturers. Their industry combines the high-wire risks of constantly advancing technology, opaque and often erratic market demand, and a voracious appetite for capital to pay for manufacturing equipment. Mr. Chang said that he expected growth over the next 10 years to average roughly 7 to 8 percent a year, well below the double-digit gains the industry has enjoyed for decades.His company has plowed billions of dollars into developing the next generation of chips to keep up with the industry maxim - first propounded by Gordon Moore, a co-founder of Intel - that the capability of microchips can be expected to double every 18 to 24 months or so. But Mr. Chang warned that the market may soon be lagging behind the potential for innovation."If Moore's law has not slowed down in the lab,'' he said, "it will surely slow down in the marketplace, and that in turn will have an effect on foundries."
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