Gartner slashes semiconductor forecast

Falling prices for DRAM chips and microprocessors will result in a sales increase of just 2.5 percent in 2007

Falling prices for DRAM chips and microprocessors badly hurt the global semiconductor market, which will likely limp to a sales increase of just 2.5 percent in 2007, according to an analyst report released Thursday.

Semiconductor sales were originally expected to rise by 6.4 percent over 2006 levels, according to the study from Gartner. But chip sales in the first quarter of 2007 were more than 5 percent lower than in the fourth quarter of 2006, leading the research company to cut its 2007 market revenue forecast to $269.2 billion.

The numbers reflect a continuing price war between Intel and Advanced Micro Devices (AMD), as the processor vendors struggle for market share. That war has already taken a toll on AMD, which blamed slow chip sales for its $611 million loss in the first quarter of 2007. Intel, a much larger company, has continued to post profitable quarters, but on May 2 added another 1,000 layoffs to a corporate reorganization it began in 2006.

Conditions are worst of all in the DRAM sector of the industry, which will see its revenue drop 11.1 percent in 2007 to $30.5 billion, then limp to a smaller decline in 2008, according to Richard Gordon, research vice president at Gartner.

The forecast could spell trouble for Samsung Electronics, the world's largest producer of DRAM and NAND flash. However, Samsung's pain may be dulled if tumbling chip prices attract consumers into stores, as prices for end-user products using NAND flash memory like PCs, iPods and digital cameras are also expected to drop.

In the long run, chip prices will continue to fall throughout 2007 as semiconductor manufacturers try to clear excess chips out of their warehouses, Gordon said. Chip manufacturers do have some cause for optimism, however, as they have already begun to control that inventory by cutting production. If that effort succeeds, the industry could return to modest growth of 8.7 percent in 2008 and 7.2 percent in 2009, he added.