There is clear softening in the global economy for the first half of 2001 and dramatic chip inventory adjustments have severely impacted Q1 and Q2 chip shipments, as OEMs use up the chips that they over-ordered last year.  For the first time in the 21-year history of the single-chip DSP market, market growth will be negative in 2001.  After Nokia's recent profit warnings and Nortel's 10,000-person layoff, along with the Fed's most recent pre-emptive discount rate cut, we have had to reassess our earlier forecast.

Unfortunately, DSP growth is almost in lock step with the overall semiconductor market "train wreck," and Forward Concepts forecasts a 25% drop in DSP shipments in 2001 to the $4.6 billion level.  Overall DSP ASP declined at an annual rate less than 6% through May of 2001compared to last year's decline of 9%, when overall DSP revenues increased by 40%.  That indicates that the current DSP market slump has not led to price erosion, as has usually been the case for, say, the DRAM market.

Part of this sad market performance has been brought on by the drop in the U.S. economy as measured by the U.S. Gross Domestic Product.  The Q1/01 GDP growth was only 1.5%, but Q2 dropped to less than half of that figure.  And now we are now seeing that the European economy is also slowing.  Assuming that the U.S. economy doesn't drop into a recession later this year, and semiconductor market recovery actually begins in Q4, we are projecting a relatively strong DSP chip growth of 35% in 2002. We forecast an 18% compound annual growth rate (CAGR) in DSP chip revenues through 2005.

The Biggest Problem

The programmable DSP chip market is driven by the communications market and the wireless segment is responsible for 53% of unit shipments.  Cellular handsets, of course, constitute the largest single sink for DSP silicon, and some 416 million cellphones shipped last year.  But, at least half of those cellphones were replacement sets, and therein lies the industry's biggest problem.  Although new subscriber growth is close to being on track, this year people are hanging on to the old cellphones longer, and it is the replacement market that has taken the biggest hit. 

Forward Concepts predicts barely 10% unit growth to 450 million cellphones to be shipped in 2001.  Next year should be brighter, though, as everybody pitches the old units to get new cellphones that will take advantage of 2.5G Internet access features (and new 3G features in Japan). If you’d like to discuss this further, send me an email or give me a call.

Will Strauss

wis@fwdconcepts.com

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