Ticking of turnaround

While I take over as Editor-in-Chief of EDN Asia, I hear the feeble ticking of a turnaround. Some caution against any optimism though, for mine is laced with a little pessimism.

For one thing, the current downturn is a crisis of abundance, unlike past downturns, which were generally crises of scarcity.

Is technology making crises of scarcity a past phenomenon and future downturns crises of abundance? The agriculture industry offers a clue. In Essay on the Principle of Population (1798), Thomas Malthus (1766-1834) predicted the inability of resources, especially food, to keep up with increasing global population, and presented a dismal picture of the future with millions dying of starvation. Malthusianism, as his theory came to be called, profoundly affected many thinkers, including Charles Darwin who acknowledged Malthus' impact in his Theory of Natural Selection.

With six billion people on the planet today, the world has never had so many mouths to feed. Yet thanks to technology, the abundance of food, and not a shortage, is the problem. There are reports of thousands of tons of food being annually dumped into the sea to prevent food prices from falling below production cost! But the food glut does not appear to have had a catastrophic effect on farmers because, notwithstanding the WTO, agriculture is heavily subsidized.

In the latest downturn faced by the electronics industry, prices of certain categories of chips and optical components- which experienced huge investments in previous years-fell below costs largely due to their oversupply. Such "excessive behavior" of the past should have haunted the industry.

But look at the situation now. The foundry business is expanding as never before. Foundry leaders TSMC, UMC and Chartered, and newer foundries such as Trecenti, 1st Silicon, Silterra and Dongbu are expanding their capacities. Mainland China will have an estimated 25 working fabs by 2005. SMIC is ramping up three fabs in Shanghai, and wants to be among the top five foundries in the world through an "extremely aggressive" expansion plan. Grace Semiconductor is equally ambitious.

IDMs such as Intel, Samsung, STMicro, TI and IBM are expanding capacities. Some are rapidly increasing their forays into foundry. In Japan, a consolidation is taking place with expansion as a major step. For instance, loss-making Elpida has a US$200 million expansion plan to come into profitability.

Analyst Future Horizons estimates that the wafer-processing capacity will increase by 50% in two years. With no killer application on the horizon, who will consume the chips?

Typically, a foundry breaks even with a capacity utilization as high as 70%. Many foundries could not reach this figure in the last two years. Again, typical foundry equipment has a high obsolescence rate, with transition to nanometer processes and 300-mm wafers. Depreciation costs account for 40 to 50% of operating costs. Would such capital equipment become obsolete even before it has recovered its costs?

The crisis of abundance is well illustrated by the DRAM industry. In 2001, DRAM chips sold below cost. In 2002, memory was responsible for the overall growth of the semiconductor industry, though at a meager 1.5%. In 2003, at least seven wafer fabrication facilities are expected to commence full operations: two at Samsung and one each at Elpida, Infineon, Micron, PowerChip Semiconductor and ProMOS. Analysts estimate that in 2003, DRAM supply will be about 65 to 70% more than the year before and this could lead to a heavy oversupply, even a market crash!

While the agriculture industry can survive a crisis of abundance because of its subsidies, the electronics industry needs to think of the consequences of any "excessive behavior."

You can reach Kirtimaya Varma at kirti.varma@rbi-asia.com