Intel is the world's biggest chipmaker

The continent's leading chipmaker, South Korea's Samsung, reported a 75% decline in profits between July and September, while Toshiba, NEC, and Taiwan Semiconductor racked up losses in excess of $1bn between them over the same period.

The semiconductor downturn is so severe that South Korea's Hynix and Micron Technology of the US are even discussing a merger, a rare event in an industry dominated by multi-billion dollar giants.

Boom to bust

But the severity of the slump in computer chips cannot solely be attributed to slowing growth in demand for mobile phones and computers.

The latest downturn has been exacerbated by some of the semiconductor industry's own peculiarities.

Computer chips are manufactured in vast sterile fabrication units, or fabs, which take two years and cost between $1bn and $2.5bn to build.

This limits the speed with which manufacturers can respond to a decline in demand for chips from end-users.

Moreover, the massive cost of re-sterilising a semiconductor plant usually makes it uneconomical to suspend production once a fab has come into service.

This means that cyclical overproduction and severe price fluctuations are a fact of life in the chip industry.

Mobiles drive chip demand

When demand dips, most chipmakers have little choice but to continue producing at full capacity, accepting whatever price they can get for their products.

Indeed, the recent slump in sales is due more to a collapse in average semiconductor prices rather than to a decline in volumes sold.

According to industry sources, computer-grade DRAM (dynamic random access memory) chips now fetch less than $3 at the factory gate, down from around $50 in 1996.

Let the good times roll

However, the big semiconductor producers are well aware that their industry is cyclical, and have various strategies for coping with downturns.

Most make sure that they can weather the slowdowns by maximising profits and paying off debts during the upswings.

And already, many leading analysts say that the spread of new generation mobile phone technology is poised to trigger the start of a new cycle.

Technology market monitors Gartner last month forecast that demand for computer chips will enter the expansionary phase of the next cycle by 2003, hitting growth rates of 30% a year.

And market leader Intel this week announced that it hit sales targets in November thanks to unexpectedly strong demand for its innovative Pentium 4 chips, sparking a rally in technology stocks.