Overarching Economic Ills Still Plaguing Industry

Electronic News, Sept 24, 2001 by Tom Murphy

Lehman Bros. analyst says lack of demand pushes out broader recovery

The terrorist attacks on the World Trade Center and the Pentagon may cause a minor increase in demand as the technology is replaced, but it is not likely to spur the semiconductor industry to a broader recovery, according to an analyst from the New York brokerage firm of Lehman Bros.

After all of the notebooks, cell phones, PD As, pagers, networks and other electronic equipment is replaced, the overarching realities of the U.S. and world economies will still be in affect as the dearth in demand resumes, said Dan Niles, a Lehman Bros. analyst based in San Francisco.

"The bad news is this is only a small blip compared to other things that are going on," Niles said of the new demand spurred by the terrorist strikes. "Compared to others, we have had a bearish outlook on the economy, and things weren't going well before this all happened."

Lehman Bros. had to cancel a technology forum in San Francisco Sept. 11 as a result of the terrorist attacks. At the conference, Niles was due to deliver his updated outlook on the economic picture.

"Consumer demand was about to roll over (before the terrorist attacks)," Niles said. "Even before that, things weren't going well as back-to-school demand never materialized. Credit card spending is down. Consumer spending is down. The unemployment numbers are going up. Then you throw the terrorist attacks on top of all that and it will not have a positive impact on consumer confidence."

As anecdotal information to add to his research, Niles said he walked into a consumer electronics retail outlet days after the terrorist strikes and noticed that customer traffic was relatively low. He asked a store clerk about business and reportedly most of the people in the store were business travelers who were stranded as a result of the suspension of air travel, apparently just milling about and not purchasing goods.

"September is the most back-end loaded month out of any quarter of the year," Niles said. "When people became frozen by this disaster, we basically lost two or three days, which could amount to 3 to 4 percent of the revenue for this quarter. Besides that, we lost the momentum of the ramp that we usually see about this time."

Niles said previously that this semiconductor downturn is more severe than others within the last decade. In fact, while there could be growth next year, it won't amount to a recovery of the revenue levels semiconductor companies were seeing in early 2000. The more likely scenario, according to Niles, is that this downturn is similar to the one in 1985, where revenues plunged and didn't fully recover for three years.

To add to the grim news, Niles said the terrorist attack and the demand for a response is fueling uncertainty and thus triggering more erosion in consumer confidence. Whereas in the Gulf War in 1991 there were clear objectives to the final outcome, it is still uncertain whether or not the United States can respond to the terrorist attacks of Sept. 11. Those responses could trigger an escalation of violence and uncertainty, Niles said.

"Two-thirds of demand is driven by retail," Niles said. "We were already weak in that department, and this won't help."

Last spring, Niles was saying that the economy could get worse before it gets better. Now this fall he is saying it appears as though the economy has reached the bottom and could start an upward turn. The peak of the market for semiconductors was in August and September of 2000, Niles said. The bottom, drawn as a correlation to the peak, will be reached in September, if it hasn't already occurred in August of this year.

"(Stock market) valuations are still high, and that will have an impact," Niles said. "I want to believe that things will all work out OK. And that if there was any silver lining in all of this, it is that there should be a concerted global effort to lower interest rates, which should add some liquidity to the market."