Analysis: Chips Hold Promise, But Questions Loom For New Year

MANHASSET, N.Y. — As the ball drops on 2005, the prognosis for the electronics industry in 2006 remains at best a puzzle to many.

Consumer electronics have had a robust holiday season, and emerging areas like satellite radio and camera phones continue to thrive. But the near-term outlook varies for chipmakers, and the forecast in key end-use areas such as gaming is not rosy.

Moreover, increasing global competition, particularly from China and India, outsourcing concerns, continuing consolidation of manufacturing, and rapidly changing technologies all cast a cloud of uncertainty for the future health of the U.S. electronics industry.

What is certain is that the pace of change in the electronics industry will continue to be rapid.

Perhaps no company symbolizes the challenges facing the electronics industry as much as Intel Corp. (Santa Clara, Calif.). Just before the year’s end, the company launched a new branding strategy designed to bolster the company’s image in consumer markets.

Intel may be seeking to improve its image in the minds of analysts, some of whom were disappointed in the company’s mid-quarter forecast issued earlier in December.

American Technology Research analyst Doug Friedman said the holiday season has been a mixed bag for chip makers.

"December bookings rates are hard to read as the December order pattern has traditionally been a poor indicator," Friedman said in a report. "We believe December order rates were strong at the start, but ended on a very weak note. We expect to hear that new products targeted at flat panel TVs, new game systems, AMD processor-based products, and MP3 players sold well."

Outlooks for individual semiconductor companies often vary depending on business.

For instance, Friedman gave a thumbs-up to Cypress Semiconductor Corp. (San Jose) for its solar power unit Sun Power, but was skeptical about the company’s image sensor business.

In a more encouraging sign, the DRAM index published by DRAMeXchange rose slightly the last week of December, possibly a precursor to DRAM prices rebounding.

Also on the upside, Mark Bachman, an analyst with Pacific Crest Securities Inc. (Portland), issued an upbeat forecast for the semiconductor packaging services market, despite troubles at top-tier suppliers such as Amkor Corp.

Meanwhile, holding true to earlier projections, consumer electronics sales have been robust during the holiday season, particularly online sales which rose 109 percent, according to a joint report by Goldman Sachs, Nielsen/NetRatings and Harris Interactive.

Satellite radio is healthy, with Sirus Radio passing 3 million subscribers. So are camera phones, whose sales are projected to reach 475 million in 2006, according to IC Insights Inc.

But the video game industry is not doing so well. SG Cowen Securities Corp. projected 2005 sales would decline 7.8 percent, rather than 4.1 percent projected previously. The firm cited one culprit as worse-than-expected supply constraints for Microsoft’s Xbox 360 game machine.

Although the global marketplace will be the key battleground for the electronics industry in 2006, the courts are likely to provide a riveting sideshow as well. The most watched court battle will be between microprocessor giants AMD and Intel, with the latter determined to prove it is not engaging in anti-competitive, monopolistic business practices as many have alleged.

Mark Lapedus contributed to this report