Revenue growth inthe semiconductor industry in 2005 will be up 6percent from 2004. This is ausual trough year of the cycle, particularly in contrast to 2001's 32 percentrevenue decline. Without the volatile memory sector, which will fall 6.3percent in 2005, semiconductor sales would actually rise 9.5 percent in 2005.2006 will see an acceleration in growth to 8.8 percent and revenue of $246billion. In 2007, the industry will exceed $250 billion in revenues for thefirst time, posting 11.0 percent sequential growth in sales to $273 billionfollowed by 13.5 percent growth to $303 billion in 2008. This is a remarkableadvance for an industry of this size.

Three factors arecontributing to the shallow trough of 2005: inventory management, capacity, andresilient end markets.

As soon as excessinventory began to accumulate in the supply chain in the second quarter in2004, companies throughout the electronics supply chain reacted effectively toreduce inventories, in contrast to the inventory accumulation of previous cycles.Instead of the ten quarter resolution of the previous cycle, excess inventoryis out of the supply chain within three quarters, ending in the second quarterof 2005. The lack of inventory is in addition to normal seasonality for theoutlook for stronger growth in the second half of 2005.

Capital spendinghas also been restrained in this cycle, representing 21 percent of sales incomparison to 2000's 30 percent spending level.

In contrast to2001, end market unit growth will largely slow in 2005, rather than decline,with some pockets of strong growth, as follows:

Consumer Market

In the consumerarea, with the emergence of Digital TV-which contains higher semiconductorcontent than standard TV's-unit sales should rise 65 percent in 2005, above the47 percent growth of 2004.

CommunicationsMarket

In the wirelesscommunications market, unit growth in handsets will slow from 30 percent in2004 to 13 percent in 2005, still driven by 2.5G and 3G handsets, whosesemiconductor content is 25 percent higher than previous generations, tosupport digital cameras, color displays, and wideband data capability.

PC Market

The personalcomputer market should slow to 10 percent unit growth from 14 percent in 2004,as corporations complete the Y2K upgrade cycle, but consumers continue to adoptnew applications such as streaming video and broadband connectivity.