Chip Makers Watch Sales Fall Sharply

MOUNTAIN VIEW, Calif. — While accustomed to the boom-and-bust nature of their industry, the companies making the semiconductor chips that run computers, cellphones, digital cameras and even cars find themselves in the middle of a collapse in sales that resembles total chaos.

With sales of most manufactured goods plunging in this recession, demand for chips is evaporating. In January alone, chip sales plummeted by almost a third from the previous year, to $15.3 billion, according to the Semiconductor Industry Association.

“This is the worst recession the semiconductor industry has seen since its inception,” said Sean M. Maloney, the chief sales and marketing officer at Intel, at a news conference Monday.

Consumers have benefited from some of the underlying turmoil. Smartphones and the cheap laptops known as netbooks are getting more powerful even as they drop in price. And the prices for the memory chips used to store information in iPods, digital cameras and cable set-top boxes are plummeting as the companies making the products grapple with overcapacity at their factories.

Major chip makers like Intel, Advanced Micro Devices and Nvidia have felt the sting of businesses and consumers curtailing their spending on computers. Last month, Hewlett-Packard, the world’s largest PC maker, reported a 19 percent drop in computer sales, while Dell, the second-largest PC maker, posted a 27 percent decline in desktop sales.

On Monday, the research firm Gartner predicted that computer shipments would dive by 12 percent in 2009 to 257 million units — the steepest decline ever.

In the memory chip industry, conditions have turned cataclysmic.

In the last couple of years the production of memory chips swelled as companies chased rising interest in consumer gadgets. The result was a vast oversupply, which led to plummeting prices. Memory prices fell 60 percent last year and could fall 40 percent this year, according to Jim Handy, the director of the chip research firm Objective Analysis.

Now, on top of the oversupply, memory makers like Spansion and Micron Technology must also deal with falling demand for the consumer devices that use their products.

“We’re in unprecedented territory for the chip industry as a whole, and the memory makers are then in a category by themselves,” said Dale Ford, an analyst at the research firm iSuppli. “These companies put themselves in a position of putting in place so much capacity that they were bleeding cash when the downturn took place.”

Burdened with aging chip factories, Micron announced in October that it would lay off close to 3,000 people, or 15 percent of its work force. In February, it said it would eliminate up to 2,000 additional jobs. Qimonda, a German memory maker, began insolvency proceedings in January.

And over the weekend, Spansion, the largest maker of a type of memory popular in cellphones, automobiles and set-top boxes, filed for bankruptcy protection after having already cut 3,000 jobs, or 35 percent of its work force. The company has said it was open to acquisition proposals.

“There is no relief valve from the credit markets,” said Thomas T. Eby, an executive vice president at Spansion, which is based in Sunnyvale, Calif.

Mr. Eby conceded that the memory chip makers brought some of this misery upon themselves by building too many factories, which led to the declining prices. But he added that chip makers must try to anticipate demand and pay for and build their expensive factories two to three years ahead of time. “The bigger issue is that no one had a crystal ball to see what was coming from the economy,” he said.

With the complexity and cost of building chips only continuing to rise, the current market conditions could accelerate a trend toward consolidation while also making it less likely that start-ups will challenge the incumbents, say industry observers.

And credit problems will probably result in some companies just disappearing, Mr. Ford said. “The industry doesn’t have its historical ability to manage through this.”