SAN JOSE -- As 2005 draws to a close, it appears the year will have been one of modest growth in the chip industry – despite negative macroeconomic factors such as the price of oil and natural disasters, says market research firm Gartner Inc.

"Semiconductor vendors remain conservative in their investment plans, which is enabling a continued gradual decline in supply-chain inventory levels and incremental improvement in manufacturing capacity utilization rates," Richard Gordon, managing VP for Gartner's semiconductor research group, said in a statement. 

Despite stellar growth in digital audio players and, by extension, NAND flash memory in the short term, there is somewhat of a void in semiconductor demand to be filled as the PC and digital cellular handset markets enter maturity, according to Gartner. These two critical semiconductor applications, while benefiting from technology migration, are approaching saturation in terms of overall growth rates in system unit production and are, therefore, losing their ability to fuel strong growth in the semiconductor market.

In the case of the PC market, a couple of significant trends will still benefit the semiconductor industry in coming years: the continuing shift in demand from desktop to mobile form factors, which have higher semiconductor dollar content, and the introduction of dual-core processors, which may have more impact than 64-bit microprocessors. In the digital cellular handset market, functional convergence -- the incorporation of functions such as digital still and video photography, digital audio playback and FM radio reception --- and the move from second generation through 2.5G to 3G is sustaining semiconductor demand, the firm concluded.

"This outlook shows that the industry is entering a new era of lower long-term growth and this market maturity is bringing with it more-sensible investment decision-making by semiconductor vendors," Gordon said. "It remains to be seen whether capital spending will continue to be controlled in the future in order to maintain a better balance between supply and demand and therefore reduce market volatility."

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