Electronics purchasers can expect a buyer's market in 2005 as demand and growth will be weaker for both components and end equipment—including computers, mobile phones and consumer electronic equipment. But while demand will soften, the good news is that the market will not plunge into a steep downturn as it did in 2001.

Still, that weakening demand means that the semiconductor industry will post just meager growth compared to the 29% growth it experienced in 2004 when revenues rose to a record $214 billion. But how little—or how much—growth depends on which analyst you ask. The Semiconductor Industry Association (SIA) projects that chip growth will be less than 2%, while electronics industry researcher iSupply forecasts 4.7% growth. Other analysts and researchers forecast growth rates ranging from 4% to 6% growth for semiconductors, as well as for passives, connectors and electromechanical devices in 2005.

"There is going to be a noticeable softening in electronics systems demand," says Dale Ford, principal analyst for iSuppli. "In 2004 systems revenue grew 9.8%, but in 2005 it will grow 5.8% overall."

He points, for example, to the lower growth rates expected for the computer segment—which is the single largest user of semiconductors. Unit shipments of desktop computers, which increased 11.3% in 2004 to 141 million units, will increase a lower percentage, 7.2%, in 2005. Along the same lines, mobile PC unit growth will grow 11% in 2005 compared to 21% in 2004.

Ford says demand is weakening because computer demand is cyclical. "There is an IT upgrade cycle" in this industry where people upgrade to newer PCs. "In 2004, we hit our peak in terms of growth for desktop PCs [and] for mobile PCs we actually hit the peak of the cycle last year."

Ford also expects mobile communications to cool off in 2005, with unit growth only about one-third of what it was in 2004 when mobile handset shipments grew by 100 million units to 670 million units. In 2005 shipments will rise by about 35 million units to about 705 million.

"We have gone through two years of hyper growth in terms of mobile handset production," driven by cell phone subscribers who have been upgrading to 2.5G and 3G handsets (equipped with cameras) that can handle video streams, says Ford. "Now it is flattening out."

But while wireless growth may slow, wired communications will growth faster than it did in 2004. Revenue from wired communications equipment will grow 9.5% to $96.8 billion in 2005. In 2004 revenue growth was 5.9%.

One of the reasons: wired communications was the last segment to recover from the 2001 industry downturn. "We see spending in the U.S. [accelerating] because of the ruling by the Federal Communications Commission (FCC) with regard to extending fiber optic technology toward the customer's home.

In that decision this past October, the FCC ruled that telephone companies don't have to open their fiber optic network to competitors as long as they bring fiber optic lines within 500 feet of customers' homes. The ruling is expected to accelerate the building of fiber optic networks, create even higher speed broadband connections and allow telephone companies to offer voice and other services such as videos and games.

While fiber-optic demand will grow, consumer electronics (CE) equipment will slow, but only slightly, compared to 2004. Total revenue for CE equipment will grow 6.8% in 2005 compared to 8.1% in 2004.

Not only is demand weaker, but DVD recorders are replacing players resulting in competition, lower prices and less revenue for manufacturers. And analysts like Ford are speculating that digital camera demand will also likely weaken because of "pressure from high resolution cameras [that are] going into mobile phones."

In addition, videogame console unit shipments will slow as the market is saturated with current generation game systems like Playstation 2 and X-Box, says Ford. "[The market won't pick up] until the last half of the year when the next generation of video-game controllers are going to be introduced.

But he is quick to add that while the slowing demand will result in weaker component revenue, it won't result in a serious decline. "It's not a dramatic downturn. It's a soft landing."

And there won't be negative growth in the semiconductor industry because suppliers—especially in the area of memory chips—are doing a better job of managing inventory and production than in 2001. "Memory manufacturers are managing capacity utilization more effectively in this cycle than in prior cycles," says Ford.

If dram (dynamic random access memory) demand eases, manufacturers switch production to nand flash or image sensors or other ICs for which there is more demand. "They don't have to keep cranking out drams off the line," says Ford, that "will moderate price declines" and prevent total revenue from declining too much.

Two areas of disagreement are whether the market has matured and where memory prices are headed. SIA assumes steep declines of 14% to 20% for memory chips depending on the type of memory product. Because of better capacity utilization, iSuppli expects prices drops to be moderate so the memory IC market will manage to post single-digit growth.

"There are some elements of maturing in the industry," says Ford, pointing, in particular, to the compound annual growth rate (cagr). "[It] used to be in the 17% range. Now it's down to 13% to 15%.

One executive who disagrees with that assessment is J.P. Dauvin, chief economist for semiconductor manufacturer STMicroelectroncs, Geneva, Switzerland.

He agrees that the global semiconductor market will slow down in 2005 to about 4%. But he disagrees that the market is maturing and sees another period of strong growth beginning in 2007 that will be driven by "killer markets and killer regions" such as Brazil, Russia, India and China.

"Prices are coming down and functionality is increasing" which Dauvin says will help open these emerging markets as new territory for electronics companies. "There are 6 billion people on earth and only about 1.5 billion are using electronics."

Product-wise, he says growth over the next 10 years will be driven by digital consumer electronics equipment, including portable devices, automotive systems, and low-price PCs.

For PURCHASING'S business outlooks for digital signal processors and capacitors see page 42.