All indications are that a recovery has begun in the electronics industry as demand for end equipment has started to pick up slowly. Momentum is expected to build throughout the year, although demand may be soft through second quarter. By late in the third quarter, leadtimes for many semiconductors are expected to begin stretching and prices for some parts will rise.

Good news for buyers is that expected shortages and price increases will involve just a handful of parts, namely, a variety of semiconductors including DRAM, flash, and linear devices in 2003. Semiconductor companies have not built new fabs because their sales revenues have been low. As demand for end equipment such as computers, cell phones and consumer electronics equipment picks up, shortages of memory ICs are inevitable.

J.P. Dauvin, chief economist for semiconductor manufacturer ST Microelectronics, says recovery in the electronics industry is underway although component sales revenue for the year may drop from 2001.

"There are many signs that the semiconductor market actually started to rebound in October," says Dauvin.

Data from the Semiconductor Industry Association (SIA) confirm this view that semiconductor revenue has actually been increasing since October. The book-to-bill ratio for semiconductors has been 1.00 or higher and leadtimes from semiconductor foundries for chips produced on 0.18- and 0.25-micron technology have stretched from 30 to 45 days, says Dauvin. "The recovery is happening. The question is 'What about the quality of this recovery?'" he adds.

Dauvin says there are four phases to a semiconductor industry upturn and the industry is now in the first phase.

"The first phase is inventory replenishing. The semiconductor buyer sees that inventories are low and he or she needs to order more parts," he says. Typically, phase one lasts two quarters. In the second phase new designs kick in, and parts are purchased for volume production of these new products. This phase lasts four quarters. In the third phase, capacity becomes tight, allocations occur and prices rise. It can last three quarters. The fourth phase is when the industry booms, allocations continue and prices are high.

"Right now we are in phase one. Phase two should start at the end of quarter three in September," says Dauvin. "It corresponds to back to school for PCs in the U.S. and renewing the installed PC base." In addition, new feature-rich cell phones will begin to be manufactured in third quarter 2002. Other end-market segments such as industrial controls and automotive will also pick up, although the wire communications market will remain sluggish.

So far, DRAM has led the recovery as revenue increased due to high prices and decent unit demand. In the second and third quarters of this year, growth will return to a wide range of semiconductor products including digital signal processors, microcontrollers, linear devices, and flash.

Because early year declines were so steep, there may not be any year-over-year growth for the semiconductor industry in 2002. Dauvin says revenue growth with be in the -2% to +2% range for the year depending on strength of the economic recovery overall.

"Zero growth seems to mean nothing, but it would provide momentum for next year," says Dauvin. "The first quarter will be 28% negative from last year. The second quarter could be another negative quarter, but single digit between -5% and -9%. The third quarter we will see positive single-digit growth, and I wouldn't be surprised if fourth quarter is in the 25-28% range," he says.

If the year ends with a +25% year-over-year growth rate, it means the industry can expect 20% growth in 2003, says Dauvin.

For buyers this could mean allocations for flash memory, linears and perhaps DRAM next year.

Dauvin believes convergence will drive the semiconductor industry. "We are close to a convergence among PCs, consumer products, cell phones and broadband access at home," says Dauvin. For instance cell phones will soon have full motion video and Internet capabilities.

"This is just the beginning of the convergence era, but it will drive the semiconductor industry for years to come," says Dauvin.

Over the short term, computers will have an impact on the semiconductor industry in 2002. Computer shipments are expected to rise about 9% this year and memory content of PCs is expected to rise from about 128 Mb per system to over 200, according to market researcher IC Insights.

An increase in PC shipments coupled with an increase in system memory content means DRAM business will improve especially later in the year.

"DRAM showed the most growth for the first couple of months of 2002," says Brian Matas, an analyst for market researcher IC insights. "Prices were up to $3.00 in January and $3.70 in February although they started to soften in March.

"Through the year we are looking at 9% growth for DRAM revenue in second quarter and as much as 34% and 47% growth in the third and fourth quarters," says Matas. Driving that growth will be PC demand.

"We believe the PC market is going to pick up. Institutional buyers will buy computers. Second half of the year will be stronger for sure, which will drive growth in the PC segment," Matas says.

DRAM revenue will rise in part due to a shift to higher density and higher priced parts. "There is a possibility that 256 Mb DRAMS will come on strong this year. A lot of 128 Mb parts are being shipped, but all other lower density parts will be declining," says Matas.

In fact, of all DRAMS shipped in 2002, 19% will be 256 Mb parts and 54% will be 128 Mb devices, according to IC Insights. There is also a major shift in architectures. Last year double data rate accounted for only about 10% of all DRAMS. This year it will represent 40% of all DRAMS as more PCs are equipped with speedier versions of the Pentium 4 microprocessor, which performs better with DDR DRAM than with synchronous.

DRAM manufacturers were encouraged in first quarter 2002 as DRAM prices and revenues both increased.

"We are pleased with how the first quarter went," says Tom Quinn, vice president of memory marketing for Samsung Semiconductor. "We saw a dramatic increase in pricing. Demand remains strong among the branded PC guys while channel business has softened. But that's because the branded guys are taking share away from the channel guys," he says.

Improved first quarter numbers for DRAM manufacturers were less a function of growing PC shipments and more a function of higher prices and rising per system memory requirements. Later in the year, PC shipments are expected to start rising as well.

"We are optimistic about commercial replacement," says Quinn. "Corporate America will replace PCs and build out its IT infrastructures."

Buyers can expect higher prices for DRAM later in the year. " DRAM is a commodity, and pricing is a function of supply and demand. We think supply is going to be lower than the historical average," Quinn says.

Buyers may also find that certain types of DRAM will be difficult to source before fourth quarter because of mix issues.

"In years gone by, there was usually one type of part at a given time such as fast page mode DRAM or extended data out (EDO)," says Quinn. "Today there are multiple technologies coexisting. We sell fast page and EDO as well as synchronous, double data rate (DDR) and Rambus," he says. In addition DRAMS come in different organizations such as 4 x 16 or 8 x 8 or 16 x 16 among many others.

Quinn says it takes eight weeks to build parts. "The mix management very much complicates the supply and demand picture. You might see excess of one type of DRAM but shortages of another, depending on how much of one is built versus how much demand," he says.

While specific mix is hard to pinpoint, buyers can expect more 256 Mb ddr drams to ship this year because it has reached per bit price parity with 128 Mb. That means a 256 Mb part, which has twice as many bits as a 128 Mb DRAM, is not more than twice the price of a 128 Mb device.

Samsung is also starting to ship a 512 Mb DRAM for high-end computers. It is roughly 10 times the price of a 256 Mb part.

"We get the price because it is new technology and we are selling it only into applications such as super high-end servers," says Quinn.

He expects 10-15% of Samsung's shipments will be RDRAM, 35% will be DDR, and the rest will be synchronous.

Quinn says that other electronic equipment is beginning to use DRAM in significant volumes. "The biggest high volume users outside of PCs today are gaming machines," says Quinn. The X-Box, Playstation II and GameCube are using DRAM.

Cell phones will also start using DRAM as well as flash and SRAM in multichip packages (MCP) as next-generation (2.5G and 3G) phones are equipped with Internet browsing capabilities.

One reason MCP will be used is that cell phones have small form factors and space is at a premium. "With MCP we use multiple dies of different technologies in a single package," says Quinn. "We take low power DRAM, a nor flash, a nand flash, and an SRAM, bond them all about at the die level and put them into a single TSOP (thin small outline package)," he explains.

Personal digital assistants (PDAs) and multifunction pagers will also use MCP and networking equipment is also using more DRAM.

A strengthening overall economy, higher computer shipments and new applications for DRAMS coupled with a lack of investment in new fabs will mean tighter supply conditions and probably allocations for some DRAMS next year. Total number of DRAM fabs built over the last five years is eight. Five years prior to that the number was 50, says Quinn. "Money is not being spent on new fabs. Even if we allocated more capital and built a bunch more factories, it wouldn't come online until the end of 2003," says Quinn.

Flash memory supply will also be tighter next year, but the buyers' market for flash should continue at least through 2002.

Business for flash is better in 2002, but there is no dramatic surge in demand, says Sudeep Sharma, vice president of memory for Mitsubishi, which focuses on nor flash for cellular telephones.

"We have seen some uptick, but I wouldn't say it is any type of sustained turnaround," he says. He is expecting business to pick up later in the year.

When that happens, Mitsubishi and other flash manufacturers will ship plenty of 32 and 64 Mb parts. There will also be growing demand for 128 Mb parts for 3G phones. A lot of flash will also be used in multichip packages.

"For this year we believe the second half will see a sustained turnaround," says Sharma. "We are expecting a dramatic increase in flash for cell phones. Our thinking is that all carriers will be rolling out next-generation technology: general packet radio service (GPRS) and code division multiple access (CDMA) 2000 phones, which will be feature rich and require a lot of memory. This will stimulate demand for replacements, which will be robust in the fourth quarter," he says.

Sharma is bullish about flash and says revenue should increase 12-15% this year.

High inventory levels at electronics manufacturing services providers have dropped, which means any uptick in demand is going to trigger higher sales, he says.

While demand for flash will likely rise through the year, pricing is not likely to rise until the fourth quarter at the earliest.

While certain product flash segments will post revenue growth in 2002, the overall industry will likely be flat after sales fell 30% to $134 billion in 2001.

PC shipments may increase, but the communications industry will likely be down again this year and the communications segment buys about 24% of all semiconductors produced.

"Weakness in the communications end equipment market will hold back semiconductor revenues," says Matas. "Flash memory, microcontrollers, SRAMS, DSPs and analog parts will be greatly affected by the weak communications market."

One key end market that could be strong this year is automotive electronics, according to Matas. "There is a lot of talk about greater electronics integration throughout the car. There are a lot of entertainment and global positioning satellite (GPS) features with a lot of electronic sensing features and processing power needed. It requires a variety of components including 32 bit microcontrollers."

The passives and connector industries will likely mirror the semiconductor industry this year.

"Business is not getting any worse," says Ron Bishop, president of Bishop and Associates, a connector industry market researcher. "We are seeing connector makers having a positive book-to-bill ratio. We expected the first quarter to be -20% compared to first quarter 2001. The second quarter should be better and we'll see growth in the third quarter," he says.

The connector business will get better as the overall economy improves.

"We are seeing the U.S. economy starting to grow again. Interest rates and inflation are low and gross domestic product is starting to improve," says Bishop. "The electronics industry grows 2.5-3 times the rate of GDP. So if GDP is on the rise, electronics will come back and come back strong," he says.

Bishop says automotive and defense should be healthy end-market segments for connector manufacturers this year.

The industry is operating, however, at about 75% capacity. So, even if demand picks up substantially, the industry can absorb more orders, according to Bishop. Even if demand increases, leadtimes won't extend dramatically.

Buyers can expect connector prices to fall about 3% this year, according to Bishop.

Manufacturers of passive components have also seen an increase in orders early in the year.

"Over the last two or three months, our book-to-bill ratio has been better than 1.00," says Karun Malhotra, director of marketing for capacitors for Murata. "We see a comeback, but we don't know if it will last. We don't know if it's real or an aberration. The book-to-bill has been going up steadily. Last year it was around 0.70."

He says inventory levels have been reduced, but "We think they may still be on the high side." He estimates that customers had about seven or eight months worth of inventory and have managed to whittle them down to four or five months. Three months would be better, he says.

Malhotra believes prices will likely decline about 5-8% per quarter until fourth quarter 2002 when tags may drop 1%.

Besides falling prices, buyers can expect greater demand for capacitors in smaller packages. Malhotra says 0402 and 0603 packages are the most popular, but there is growing demand for smaller 0201 packages especially in the cell phone industry.

"Cell phones use 0402, but there is movement to 0201. The bottleneck is customers don't have the handling or placement equipment to handle the tiny parts," says Malhotra. "A 0402 package is about one millimeter in length and half a millimeter in width. A 0201 is about a third of that size," says Malhotra. "They are basically like a grain of sand."

He adds that ceramics have replaced tantalums in many cell phones. A cell phone might have about 200 capacitors and about 12 are tantalum. Now tantalum devices are being replaced by ceramics for reasons of higher capacitance and past supply problems with tantalum.

However, buyers know that supply problems are inevitable in the boom-bust cycles of the electronics industry. Tantalum capacitors were in short supply during that last boom as were flash chip resistors and analog ICs. In previous booms, logic and DRAM were in short supply. All of these could be in short supply next year and savvy buyers know that now is the time to work with suppliers to minimize future problems.