Xcess inventories and lack of new orders will result in a severe semiconductor industry decline in 2001. Market researcher Gartner Dataquest forecasts a 17% decline for semiconductors this year. The research arm of procurement services company iSuppli forecasts a 19% descent this year.

"Bloated inventories continue to put a damper on unit ordering and prices," says Greg Sheppard, vice president for iSuppli's market intelligence services. "When order and revenue growth begin to pick up in third quarter, it will be at a slow rate due to soft demand from the main market drivers."

New fab capacity is coming online and weak demand for semiconductors will mean further price erosion for many chips, especially memory, application-specific standard products and microcomponents, Sheppard says.

He says the industry downturn is unique for being both rapid and steep. "The three applications sectors that were driving demand—PCs, wireless and networking—have all hit the skids simultaneously. And our forecasts for future growth in each of these areas are far below the levels of the past few years."

But the news isn't all bad for semiconductors, Sheppard says. He notes the PC sector and its supply chain have reached inventory equilibrium, even though unit growth rates are nearly half what they were a year ago. The upshot is that replenishment ordering is returning to the PC arena.

The wireless market will soon return to replenishment ordering as well. And excess inventory problems at contract manufacturers should also be worked off soon with shipments of finished goods beginning to accelerate slowly in third quarter. Prospects for foundries should brighten in third quarter 2001 as big communications-centric customers resume component ordering as well.

Gartner Dataquest forecasts that the chip market will decline 17% to $188 billion. "In 2001 all product types are seeing a serious decline in revenue with DRAM and flash memory category dropping 26%," says Tom Starnes, chief analyst for Gartner Dataquest's semiconductor group.

Many analysts and chipmakers had predicted that inventories would be worked off by second quarter 2001, but now concede it will take until the third or fourth quarter for this to happen. A problem, according to Joseph Grenier, group vice president and worldwide director of Gartner Dataquest, is that semiconductor stockpiles become virtually worthless if the inventory becomes outdated before it can be sold.

But while total revenue from semiconductor sales is expected to decline this year, it will grow 13% in 2002 and then 24% in 2003 when the market will reach $265 billion, according to Gartner Dataquest. Application-specific integrated circuits and logic should see the highest overall compound annual growth rates, topping 10% through 2005.