Semiconductor industry will continue to contract

The number of companies building and designing microprocessors is likely to shrink by about 40% over the next 10 years, analysts...

The number of companies building and designing microprocessors is likely to shrink by about 40% over the next 10 years, analysts from Gartner at the firm's Semiconductor Industry Summit conference predicted.

"We are expecting [there to be] far fewer chip suppliers in the next 10 years or so," said Jim Tully, Gartner's vice-president and chief of research.

The semiconductor industry was hit hard by a downturn in high-technology spending that began in 2001, before recovering late last year. However, this recovery is not expected to last.

Gartner research predicts that there will be weakness in the semiconductor market until 2006, combined with consolidation in the industry, Tully said.

As chip makers begin integrating features like processing, networking and graphics on to single chips, many companies that today focus on a particular system function will have to change their ways. That will, in turn, reduce the number of chip-makers in the industry, Gartner research predicted.

Pat Gelsinger, Intel's senior vice-president and chief technology officer, agreed that consolidation is in store.

The move toward including a greater number of systems components on microprocessors will also put pressure on chip companies that do not own manufacturing facilities, called fabs, Gelsinger said.

"That is one of the reasons you are seeing design costs for some of the fab-less guys going up," Gelsinger said.  "That will drive consolidation going forward."

Gelsinger predicted that Intel will maintain its historical pace of doubling processor performance every two years for at least another decade, at which point the company will be building chip components using a 20nm process - far smaller than the 90nm process that is just now becoming state of the art.

By the time it is using a 20nm process, Intel expects to be building processors in the "20 billion transistor range", Gelsinger said. Intel's current Itanium 2 processors contain about 500 million transistors.

However, more advanced process technologies, and the added complexity they introduce, will slow down the rate at which "fab-less" companies can bring their own chips to market, Gelsinger said. "It's going to increase the separation of the haves and have-nots"

And keeping pace with the technology required to maintain a state-of-the-art fab is not cheap, Gelsinger added.  "If you're not investing at the rate of $2bn (£1.12bn) capital [per year], get out of the business," he said.

Although Intel experienced weaker than expected consumer PC sales during the recent back-to-school period in the US, the company sees potential in countries like China, India and Brazil, Gelsinger said. 

"We have not given up on the  PC market. We think there is still a growing business there, especially when you consider it geographically," he said.

"Ultimately the semiconductor business can be five or 10 times the size it is today," he said. "There are a few turbulent years of cycles between now and then, but ultimately it's a growth business."

But the industry will not hit the high growth rates Wall Street analysts once expected, Gartner said.  "We saw 16% growth up to 1996," said Tully, predicting that rate will fall to 10% through 2010.

Robert McMillan writes for IDG News Service

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