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LONDON/TAIPEI (Reuters) – Fresh signs of a downturn in global chip demand emerged on Friday, as STMicroelectronics cut its fourth-quarter outlook while industry sources said two leading Taiwan companies are looking to slash costs.

Franco-Italian STMicroelectronics NV lowered its sales and earnings forecast for the current quarter, while sources said Taiwanese contract chip makers TSMC and UMC may slash costs as a steep fall in consumer spending takes hold.

Consumers have reined in spending as the global economic downturn bites, cutting demand for goods ranging from mobile phones to cars which are big markets for chip makers.

Shipments of mobile phones are set to decline in 2009 after several years of seemingly unstoppable growth, while the automotive industry, the only source of profitable growth for many chipmakers in recent years, is scaling back production and laying off thousands of workers.

STMicro, Europe’s biggest semiconductor maker, blamed a recent slowdown in the wireless, automotive and computer peripheral sectors for cuts to its fourth-quarter sales and earnings forecasts, just a week after reaffirming them.

Yet STMicro is just the latest chipmaker to rattle the sector with a warning.

Intel Corp, the world’s biggest chipmaker — whose microprocessors power eight of every 10 PCs in the world — said earlier this month it expected a sharp drop in fourth-quarter sales as consumer as well as corporate demand slumped.


Its weak outlook for the sector was corroborated by industry heavyweights Applied Materials and National Semiconductor.

And the prospect of TSMC and UMC preparing for further cuts is another strong signal to the sector, as more and more semiconductor companies farm out manufacturing to such foundries to save on the enormous costs of building their own fabs.

Two industry sources close to TSMC told Reuters department heads at the company had been told they may have to cut costs by up to 20 percent through layoffs or imposing mandatory unpaid leave, having already instituted a hiring freeze.

UMC has also told employees they may be forced to work a four-day week in the near future, according to another industry source.

The Semiconductor Industry Association said last week it expected global semiconductor sales to fall in 2009 for the first time in eight years, sending the key Philadelphia semiconductor index to its lowest level in a decade.

SIA President George Scalise said the industry was in an "unprecedented era" without the strength to recover which it might have in more normal times.

The highly cyclical semiconductor industry is used to dealing with boom and bust as it struggles to second-guess the right balance of supply and demand, while prices are on a constant downward trajectory as production becomes commoditized.

The entire technology sector went through a severe downturn early this decade, but inflated stock market valuations took much of the blame in the dot-com crash and this time around it must deal with a general economic recession.

(Additional reporting by Baker Li in Taipei, Matt Gil and Dominique Vidalon in Paris; Editing by David Holmes)