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Contract chip makers will have a tough time this year, as analysts lower revenue projections for contract chip makers to 5.1 percent, market researcher Gartner Inc. said Monday.

A weak first quarter hit the industry harder than expected, as growth declined 12.5 percent compared to the previous quarter. Although a recovery for the industry is underway, revenue growth will be far worse than the 16.7 percent growth the industry achieved last year, Gartner said in a report. Next year will be a boom year for contract chip makers, but the market researcher did not provide a firm prediction.

Part of the first quarter drop was normal for the time of year. Holiday shoppers tend to take a breather in the first three months of the year, so sales of a number of electronics typically fall. But contract chip makers have also faced a chip glut, which caused some companies to reduce orders.

Chip shipments by contract makers fell by around 3.8 percent sequentially in the first quarter, Gartner said, while average selling prices slumped about 9 percent. Fewer high-end chips, which command higher prices, were ordered during the quarter.

The market researcher said the weak quarter marked a bottom for the industry. Chip makers have largely agreed.

The world's largest contract chip maker, Taiwan Semiconductor Manufacturing Co. Ltd. (TSMC), posted its worst quarter in nearly two years in the first quarter. But it said the industry bottomed out during the quarter and will improve as the year goes on because demand is improving and the chip glut has eased. The company's top rival, United Microelectronics Corp. (UMC) also called the first quarter the low point for the year.

"Following two consecutive quarters of decline, we estimate that the foundry market will grow 11.9 percent sequentially in the second quarter of 2007, mainly because of inventory replenishment and a better pricing environment," said Gartner. The communications segment is leading the recovery, while demand for consumer electronics is also reviving, the market researcher added.

Last year, TSMC, which founded the contract chip-manufacturing or foundry industry in 1987, took a 45.2 percent share of the contract chip market with revenue of US$9.7 billion, according to Gartner. Chip industry revenue totalled almost US$260 billion last year, while the contract manufacturing segment accounted for $21.5 billion of that figure.

By: DocMemory
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