A year ago, the semiconductor industry seemed poised to bounce back after several years of recession-era sales declines.
But renewed economic uncertainty has slowed demand for the tiny electronic chips made by L.A.-area semiconductor companies. In addition, natural disasters in key manufacturing regions could further impede recovery.
“As a result of the renewed macroeconomic concerns, there’s a global supply chain inventory contraction that has taken place,” said Craig Berger, an analyst with FBR Capital Markets Corp. in New York. “The Japanese earthquake in March and Thailand floods in September have impacted things as well.”
Five L.A. companies doing business in the semiconductor industry are listed on the LABJ Stock Index. Chip makers such as El Segundo’s International Rectifier and Camarillo’s Vitesse Semiconductor have been directly hurt by recent economic concerns such as U.S. market volatility and the European debt crisis.
International Rectifier manufactures chips for a variety of equipment, including power-saving washing machines and cars with electronic steering. When the recession began to ease in 2010, its equipment manufacturing customers began to stock up on chips, Berger said. But renewed economic concerns have caused those customers to cut back on orders.
Revenue for the quarter ended in September was $303 million. Although that’s an increase from $281 million in the same period the previous year, it was hurt by softening demand. The company estimated that revenue for the quarter ended in December would fall lower, between $240 million and $270 million.
An International Rectifier spokeswoman declined to comment, citing a quiet period preceding the company’s upcoming earnings announcement. But Chief Executive Oleg Khaykin said in October that economic factors led to the slowdown in sales.
“Sales during the September quarter were impacted by softening end market demand,” Khaykin said in a statement. “We take a conservative outlook for the December quarter as we and our customers work to reduce inventories.”
Vitesse, which makes chips for telephone and Internet networks, is telling a similar story. The company reported a net loss of $4.6 million for the quarter ended in September, compared with net income of $14.8 million in the same period in 2010. Quarterly revenue was $30.3 million, down 29 percent from $42.9 million during that quarter the previous year.
The company did not respond to a request for comment.
David Kang, an analyst with B. Riley & Co. in San Francisco, said Vitesse customers – network equipment manufacturers such as Cisco Systems and IBM – are especially sensitive to economic downturns.
“When there’s a recession or talk of recession, capital spending goes down and the suppliers like Vitesse suffer,” Kang said.
Other companies in the semiconductor industry have experienced a decline in sales, including Taitron Components Inc., a Valencia semiconductor distributor.
Taitron’s third quarter revenue was $1.68 million, down from $2.04 million in the third quarter of 2010. The company also reported a net loss of $160,000, compared with a loss of $52,000 in the same quarter the previous year. The company attributed the revenue decline to lower demand.
But Stewart Wang, Taitron’s chief executive, said the company is shifting from distributing chips to designing them, a change he sees as exploiting potential for growth.
When 2011 earnings are reported, “the components division is going to be flat, but engineering and product services is going up,” he said. “It’s a way of survival. You have to find a way to generate income.”
Taitron’s stock has been on the rise. It closed up 4.9 percent, or 5 cents, to $1.07 for the week ended Dec. 28, making it one of the top 10 local gainers on the LABJ Stock Index (see page 26).
Meanwhile, troubles in Thailand has exacerbated the industry’s sales slowdown.
The country, which is a hub for semiconductor assembly and testing, was hit in July with heavy rains that continued into December. They caused floods that killed more than 600 people and displaced thousands.
Many semiconductor facilities there have been shut down due to the flooding. Also, a number of manufacturing plants for equipment that require semiconductors, such as computer hard drives, were hit. As a result, industry giants such as Intel Corp. and Dell Inc. have adjusted their earnings guidance to reflect the possibility of reduced demand for their chips.
Semtech, a Camarillo supplier of analog and mixed-signal conductors, announced in late November that the flooding could result in a 13 percent to 18 percent decline in revenue for the quarter ending in January.
The company reported revenue for the quarter ended in October of $124 million, up from $123 million in the same period the previous year. Net income was $27 million, up from $16.1 million.
For other L.A.-area semiconductor companies, the flooding won’t directly hurt sales, but it is expected to put a stress on business. International Rectifier, for example, noted in its October filing with the Securities and Exchange Commission that the flooding has impacted some of the second- and third-party manufacturers used to perform final assembly and product testing.
“We currently expected to be able to relocate outside the affected area,” the company stated. “Accordingly, at this time we do not believe the flooding will have a material impact on our financial results.”