The economic difficulties being experienced by many smaller chip companies that build silicon for telecommunications and computer equipment makers can disrupt supply chains of specialized chips and send buyers scrambling for alternatives if the small chip company fails.
Relative to this, as smaller chipmakers such as TransSwitch and Conexant Systems struggle to weather the current economic storm, experts have noticed that the smaller chipmakers that outsource their manufacturing stand a better chance of staying buoyant than companies that operate their own manufacturing equipment.
"When you get into communications there isn't quite the same need for having standardized broadly deployed platforms," said Richard Partridge, a senior research analyst at D.H. Brown & Associates Inc. "These smaller companies are specialized, they've made some engineering trade-offs to work in a certain kind of device."
Small chipmakers such as TranSwitch, Conexant Systems, and PMC-Sierra have been ailing alongside giants such as Intel and Advanced Micro Devices as technology spending has cooled. Companies dependent on specialized chips from these and other smaller chipmakers could find themselves facing not only supply problems but potential redesigns of their products if a small chipmaker fails.
"You can, with some time, redesign and make a next-generation platform that would depend on someone else's semiconductor componentry," Partridge said. "For those [companies] that had heavy dependence on a particular, unique product from one guy, if that guy goes belly-up that's really going to have an impact. There's a concern."
TranSwitch, a communications semiconductor company in last week warned that its second-quarter revenue would total no more than $US12 million, dramatically lower than the company's $34 million expectation set in April. The TranSwitch news came on the heels of similar lowered earnings expectations from PMC-Sierra and Conexant.
PMC-Sierra and Conexant both cut jobs. TranSwitch will keep its current head count.
However, Legerity, a communications chip company and AMD spin-off, has been relatively unscathed, according to Legerity spokesman Dave Weisman.
The reason for such differing outlooks from companies in similar markets comes down to outsourcing, said Joe Jones, CEO of Bridgepoint, a semiconductor testing company with clients such as Texas Instruments and Philips.
"This is the biggest argument for outsourcing I've ever seen," Jones said. "[For smaller companies] carrying all your own [manufacturing] capacity on your own back is going to kill you in the downturns."
"All of these companies have enjoyed pretty big parties over the last two or three years," Jones said. "When business is good you take the business you can. It's the ability to come back down that's going to distinguish these [small chip companies] on who's the best survivor."
"Legerity is in a very good position," said Jones, as it is "a fabless company" that outsources its manufacturing. This allows Legerity to face a slow down of orders without being concerned about paying for idle manufacturing equipment, Jones said.
"PMC-Sierra has a whole lot more built-up infrastructure, and TranSwitch is in between [Legerity and PMC-Sierra]. And those that are carrying the least amount of overhead in these kind of time typically do the best," Jones said.
"The little guys, the fabless guys, are doing much better than the integrated device manufacturers because they're not walking around with these wafer fabs on their back," Jones explained.
Jones is optimistic, however, predicting a relatively fast recovery for small chipmakers.
"This recession should be very short because the inventory burn-off is occurring very rapidly, because people cut back on production so much," Jones said.
The Semiconductor Industry Association (SIA) agrees, predicting a 21 per cent growth rate in sales across the entire chip market in 2002 and a 25 per cent growth rate in 2003. SIA said chip sales are expected to decrease by 14 per cent this year.