Endings and Beginnings

I have to admit, it was a fitting end to 2001. I had just returned from a family road trip to Florida on Dec. 31. Upon my arrival I dutifully hooked up my laptop to my small network to check the news and download a batch of e-mail. That didn't happen. All I received was failing screens and the warning beeps of dead memory on the motherboard. My laptop would only operate with minimal drivers. Grrr . . . After ranting and raving for a while, I decided the only solution was to do a full upgrade.

I realize these things die after a certain amount of use, but why did this one fail on the last day of the year? Murphy's Law at its finest . . .

After spending New Year's Day installing the latest from Microsoft and transferring my files, I packed my bags and headed out the door to attend the annual Industry Strategy Symposium (ISS). ISS is the semiconductor and semiconductor equipment forecasting session — where analysis and predictions for the coming year are shared with the industry's top executives. With new machine in tow, the optimism started to build.

Apparently I was not the only one feeling optimistic during the first week of this year. Semiconductor and semiconductor equipment stocks shot higher in a scorching rally. In last month's column I mentioned that Wall Street was getting more bullish, and that prices could move higher in the early months of this year. Alas, shares in the capital equipment sector have pulled back since Intel announced that it would spend $5.5B in 2002 — below the expectations of many on Wall Street. It's going to be a grinding recovery this year. Many say the second half will be much better.

Even though Intel's cap-ex is going to be off this year, we may see some incremental improvement in end demand to support the semiconductor.

It won't be a barn burner but it will be much more stable. At the PC level, the performance gap between the fastest microprocessor and what is commonly used throughout the computing world is widening. That does not mean people and corporations will rush out and buy the fastest offerings, but it does suggest that we are on the verge of an upgrade cycle. Personally, I am quite satisfied with my upgrade and the advances in the software platform. It simply works better.

Price is still an issue. I see this in the end markets and I see it in the chip manufacturing business. In May 2000, I was invited to speak at a CEO summit about the future of the chip business. At that time the air was just starting to flow out of the Internet bubble, but I mentioned during my speech that bursting the first bubble would eventually lead to bigger and better things. I still believe that today. I am seeing a focused effort to develop and implement productivity measures inside the wafer fab and throughout the supply chain. The Internet plays a huge role in this effort.

During the next few years, I suspect — assuming a "canoe-shaped" recovery — to see a trend where investments that enhance the productivity and profitability of existing facilities move to the top of the priority list. Some will say this has always been the case, but experience tells me that, when the opportunity to order and install big iron appears, plans to develop packages (read: software) that reduce ongoing fab expense lines get shoved to the back burner. With this thesis in mind, my investment search is aimed at finding companies building products that help reduce the ongoing cost of fab operation.