UDPATE: Even Chip Makers Will Suffer From Detroit Downturn
13 December 2008 - 7:29AM
Dow Jones News
The fate of Detroit's auto makers, facing possible bankruptcy,
will have repercussions at semiconductor makers in Silicon Valley,
Texas, Europe and Asia.
The automotive sector has become increasingly important for chip
companies as software and technology merge with traditional car
operations and consumers seek more electronic diversions while they
travel. Automotive sales represent only a sliver of total
semiconductor revenue, but as the Big Three car makers contemplate
their futures and large foreign makers suffer through the global
downturn, companies that supply them with chips are likely seeing a
traditionally small but steady sales channel falter.
"It's a relatively small part of their business overall,"
Needham & Co. analyst Quinn Bolton said. "But clearly weakness
in the auto industry is going to hit the semiconductor
industry."
While many semiconductor companies sell chips to the auto
industry, those with a larger exposure in the U.S. include Texas
Instruments Inc. (TXN) and privately owned Freescale Semiconductor
Inc. Infineon Technologies AG (IFX) and ST Microelectronics NV
(STM) sell more to European car makers. Japanese manufacturers
often turn to NEC Electronics Corp. (6723.TO) and unlisted Renesas
Technology Corp.
Bolton expects TI to generate roughly $500 million in revenue
from its automotive segment in 2008, out of a total revenue base of
about $12 billion.
Texas Instruments didn't respond to requests for comment.
Overall sales have been declining for chips used in cars and
trucks throughout the wider economic downturn, but the situation is
quickly worsening.
In 2007, revenue for chips used in the automotive segment was
$20.5 billion, according to research firm Gartner. Earlier this
year, Gartner's automotive chip analyst Mike Williams was expecting
2008 sales to grow, slightly, to $20.9 billion. Now, Williams said,
he expects a decline of roughly 4% to about $19.8 billion;
meanwhile, the market continues to deteriorate.
"In 2009, we'll be looking for a decline. We'll be lucky to see
a 10% decline in this market," Williams said.
For most chip companies, the drops in share prices over the past
year have been much larger. Shares of analog chip giant TI has
fallen more than 53% over the past 12 months. ST Micro is down 58%
from last year, and Infineon - dragged down by its Qimonda AG (QI)
memory business - has fallen 93% and trades below $1.
TI shares were recently up 2.8% to $15.56. ST Micro was up 1
cent to $6.56 and Infineon was down 2 cents to 88 cents.
Chip companies are feeling the most pain from the drops in
demand for consumer electronics, which represent the majority of
total chip sales. According to Gartner, automotive semiconductors
account for only roughly 7% to 10% of the total chip market.
But auto weakness adds another industry - one that used to act
as a ballast to the ebb and flow of other segments - to the list of
declining areas for chip revenue.
"It certainly used to be that automotive was a steadier business
for these guys that did have exposure," Needham's Bolton said.
"Having auto exposure used to be seen as a positive."
"In this kind of market, auto is not going to be perceived as an
area of relative safety," he said.
Of course, the situation of most chip makers doesn't compare to
that of the Big Three U.S. auto makers.
Late Thursday, senators failed to reach agreement on a proposed
$14 billion government rescue plan to halt a possible collapse of
General Motors Corp. (GM) and Chrysler LLC. In addition, GM said
that it is shutting most North American assembly plants for about
30% of the first quarter, according to The Detroit Free Press.
Foreign car makers, while less financially shaky, are also
struggling. Honda Motor Co. (HMC) said Friday that it was again
cutting North American production. A week ago, Toyota Motor Corp.
(TM) announced more production cuts, as well.
Analysts say the industry is also suffering from a congested
sales channel. As inventories pile up due to low demand, suppliers
are left to watch sales fall.
"The dealerships are full of inventory at the moment and the
automotive manufacturers also have very full car parks full of
vehicles... it means that there is really nowhere to build cars and
put them," Gartner's Williams said.
"The channel has become clogged," he said.
-By Jerry A. DiColo, Dow Jones Newswires; 201-938-5670;
jerry.dicolo@dowjones.com
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