Life in the Slow Lane
Carl Johnson, INFRASTRUCTURE -- Semiconductor International, 7/1/2001
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That about sums up the way it feels in the semiconductor industry right now. Actually, some may feel like they are going in reverse. It's a real grind. And it's not any fun.
Over the past month I have been on the road to talk with investors, people in the semiconductor industry and the capital equipment industry. There is not much good news to bring to the masses, although I have found it important to convey, "The industry is not terminally ill; it's just temporarily sick." Like a traffic jam that will get unjammed. We just have to be patient.
In the long run, we know this downturn will pass. Near term, we must deal with the weakness. Many companies have already gone through their downsizing and restructuring. Hopefully by now, operating models have been adjusted to reflect the current level of business. The sad thing about the adjustments is that even they are unlikely to stop some red ink from flowing during the latter quarters of this year. The industry got really big really fast, and now it has to get really small really fast.
Financial losses — Expect to hear a lot of stories about big losses. So far we have yet to see the red ink flow in any meaningful manner. I suspect many companies will bite the bullet during the next two quarters, taking all the write-downs they can. There will be a housecleaning on the operations front that will entail the closing of business centers that are unlikely to be profitable during the next cycle. If an entity can't be cleaned, or is too large to close, sales will be explored. It will be a wholesale restructuring.
All this is good in the long run and is nothing new for a downturn. The one thing restructuring does impact is the sentiment on Wall Street. I suspect investors will become a little less enamored with stocks in the semiconductor and semiconductor equipment sector as we move through these trying times. The recent bookings and shipment data offered by SEMI seems to indicate that the industry is reaching that level where revenues are generated solely by the sale of spares, maintenance, engineering services and the occasional technology buy. To say there is no downside yet is foolish. Shipments for front-end wafer processing tools are only off 30% compared with last year. Remember last year? There was no traffic jam. It was smooth sailing.
I could, of course, be wrong. You don't hear that from someone in the forecasting business very often, but I like to step on my ego occasionally. So, I am open to just about any outcome. Investors might continue to hang in there with the Wall Street analysts who say that the bottom is coming in the third quarter. You know, those analysts who are saying the time to buy the stocks is somewhere between now and August (leaving plenty of leeway is a natural thing to do). Realistically, I am not very optimistic about an explosive rally right now. If the Federal Reserve System were to drop interest rates through the floor, energy prices were to collapse and a new round of end demand were majestically to appear I would be a bit more constructive. That's not realistic.
I am never totally out of the market. One might say that we have a little toe in the water. Ultimately, the elusive trough valuations I mentioned earlier this year may come to pass. It could happen quickly, so keeping some powder dry seems necessary.
Carl Johnson is president and co-founder of INFRASTRUCTURE (www.infras.com). He can be reached by phone at 1-972-492-7208
