NEW YORK/TOKYO (Reuters) - Investors looking to bet on the global chip industry may want to put their money in fast-growing analog chips, with the downtrodden computer memory market poised for only a modest recovery this year.
Prices for flash memory chips used in portable devices appear to be stabilizing, but executives at the Reuters Global Technology, Media and Telecoms Summit said they were less certain of the timing of a recovery in that sector.
"I'm kind of worried about flash," said Hiroshi Suzuki, chief executive of Japan's Hoya Corp (7741.T), which makes photomasks used to copy electronic circuit patterns onto semiconductors.
"For DRAM, I think we probably saw the bottom already. It looks like the flash supply capacity equation is actually worse than the DRAM side," Suzuki said at the Tokyo summit.
Analysts expect global sales of dynamic random access memory, or DRAM, mainly used in computers and increasingly in cutting-edge mobile phones, to fall by 10 percent this year before growing by about 20 percent in 2009.
Top DRAM suppliers Samsung Electronics Co Ltd (005930.KS) and Hynix Semiconductor Inc (000660.KS) have seen prices rebound since April, leading industry executives to expect a return to a balance between supply and demand sometime in the second half of the year.
"The DRAM industry has been in the last couple of quarters going through a dramatic price decline. It's simply (that) there was too much supply in the market," said Kin Wah Loh, the chief executive of Qimonda QI.N, the world's fourth-largest maker of computer memory chips.
"We are seeing now the effect of this reduction in supply and that is a good sign," Kin said in Tokyo. "It's really a matter of time, technology and supply. Going forward in the second half the supply will be more balanced."
Japan's Toshiba, whose semiconductor business posted an 80 percent plunge in operating profit in January-March, said it expected the price of NAND flash chips, used in portable gadgets like Apple Inc's (AAPL.O) iPod, to be flat this quarter.
"Prices will either be flat or go up a bit in July-September," said Corporate Senior Vice President Shozo Saito at Toshiba, the world's No. 2 NAND maker.
Even though prices are stabilizing, to be safe, the company was still prepared for a drop of up to 50 percent this business year, Saito said.
In this environment, the world's largest maker of chip manufacturing equipment, Applied Materials Inc (AMAT.O), predicted a cut of up to 35 percent in capital spending for the industry in 2008.
CEO Mike Splinter said he was also looking for a recovery, but that it would drag into 2009 due to a flash and DRAM capacity surplus.
"As demand grows in the second half of the year, we will see that starting to come back modestly, but I am not calling for a very fast recovery here at all," Splinter told the summit in New York.
One bright spot in the $270 billion global chip industry is analog chips, which convert real-word phenomena such as light and sound into digital signals that can be read by a computer.
In the next five years the analog chip market is expected to grow on an average compound annual rate of 7.4 percent compared to growth of 6.5 percent in the general chip market, market research firm iSuppli says.
Texas Instruments Inc TXN.N, which has been best known as a supplier of chips for cellphones, is now looking to analog as a key driver for growth as the wireless market matures.
National Semiconductor Corp (NSM.N), which has a roughly 4 percent share of the analog chip market compared with TI's 12 percent according to iSuppli, is looking to areas such as solar panels for growth, as well as longer term projects in healthcare and cellphone charging.
As the chip market recovers, Applied Material's Splinter forecast consolidation in chip manufacturing capacity, but he said it would likely come in the form of manufacturing and research and development alliances, rather than buyouts.
"Partly because those kinds of things are much easier to get done ... the stock values of those companies is not very high, so it's hard to use stock or cash to acquire somebody else," he said.
Executives at Toshiba and Elpida Memory Inc 6665.T agreed.
"It's simply easier to lower defect rates and increase yield if you start from scratch," Elpida CEO Yukio Sakamoto said when asked if the world's No. 3 DRAM would consider buying out a smaller maker.
"Acquisitions don't suit our semiconductor business, and we don't plan to be aggressive on M&A," said Toshiba's Saito. "We will use outsourcing to counter volatility in the chip business."
Texas Instruments Chief Executive Rich Templeton also said the chip industry was unlikely to see many mergers and acquisitions because of its diversified nature.
"I think it continues to be reasonably diversified by technology and supplier. I don't think you're going to see an overall consolidation," Templeton said.
(For summit blog: summitnotebook.reuters.com/)
Additional reporting by So-eui Rhee