Chips Are Up, but Economy Isn't

News coming out the chip sector has been great so far this week, but analysts warn that economic woes such as the housing mess might still spoil the party.

The consensus among analysts appears to be that corporate and personal spending on technology products will be hurt by the housing issues in the U.S., but nobody knows how bad the impact will be, according to Peter Sutton, head of research at CLSA Asia-Pacific Markets in Taipei. Demand for technology products, especially computers and mobile phones, in the rest of the world is going strong, he said, but even that demand could pull back in the event of a U.S. slowdown because many developing countries depend on exports to the U.S. for income.

By the end of this year, people should know how bad the loan and home foreclosure situation will be, according to Sutton. The housing market in the U.S., he said, is expected to bottom in the first quarter of next year. The fear is that the housing issues could hurt consumer spending at some point later this year, but so far the technology industry isn't showing any signs of trouble.

The flow of good news started in Asia on Monday with the world's largest contract chip maker, Taiwan Semiconductor Manufacturing Co. Ltd., reporting record high sales in August and revising up its third quarter financial guidance.

The company, considered a bellwether for the overall tech industry because of the variety of gadgets it makes chips for, said consolidated sales in August rose 10 percent year-over-year to NT$30.02 billion (US$907.0 million), beating its previous record of NT$27.96 billion from July of last year.

TSMC also predicted its third quarter revenue will likely hit between NT$87 billion to NT$89 billion, higher than a previous forecast of NT$85 billion to NT$87 billion, and said its gross margin would come out at the top end of expectations. Some customers asked TSMC to ship some chips earlier than expected, a spokesman for the company said, but the company won't comment on how that might impact the fourth quarter.

Taiwanese chip designer MediaTek Inc. followed up TSMC's news, announcing an agreement to buy certain telecommunications chips products from Analog Devices Inc., of Norwood, Massachusetts, for US$350 million in cash. The deal itself isn't huge, but merger and acquisition activity normally takes place when companies see bright prospects for the future, and MediaTek is looking to use the acquisition as part of its mobile phone chip strategy.

Among the products the company acquired is a chipset used in TD-SCDMA (Time Division-Synchronous Code Division Multiple Access) basebands and radio receiver products, which will help it increase its presence in its main market, China. TD-SCDMA is the 3G (third-generation) telecommunications standard being pursued in China.

Positive corporate news for chip makers didn't stop in Asia. As the work day opened in the U.S., technology industry watchers were treated to the long awaited launch of Barcelona, the new quad-core processors from Advanced Micro Devices Inc. The Sunnyvale, California company announced a number of companies are already using the chips, including IBM Corp., Sun Microsystems Inc., Dell Inc. and Gateway Inc.

The world's largest chip maker capped Monday with the biggest news of the day. Intel Corp. raised its third quarter revenue forecast to between US$9.4 billion and US$9.8 billion from a previous range of US$9.0 billion and US$9.6 billion, and said its gross margin would be at the upper end of guidance due to stronger than expected global demand for computing products.

Despite the strong chip news and outlook for the current quarter, which ends Sept. 30, the future remains uncertain.

"Near term data shows little evidence of order cutbacks in the tech supply chain," said Warren Lau, chip analyst at Macquarie Research Equities. "But having said that, the question remains: will the sky come crashing down because of the meltdown in the U.S. subprime markets?"