By Don Clark 

SAN FRANCISCO -- Semiconductor makers and their suppliers are scrambling as smartphones and personal computers ebb as dependable drivers of sales growth. Their traditional response -- making chips that can do more, thanks to ever-smaller circuitry -- isn't expected to be sufficient to turn the tide.

The pressures, which have driven a broad wave of consolidation in the sector, are hot topics this week at the big annual gathering in San Francisco of companies that sell tools and materials to make chips. An industry group that represents makers of manufacturing gear on Tuesday projected that their global revenue will grow only 1% to $36.94 billion in 2016, following a decline of nearly 3% last year.

Another industry group had previously projected total revenue from chip sales to decline 2.4% in 2016, largely due to slowing growth in smartphone sales and ongoing shrinkage in the PC market.

"The question is, what will drive the growth?" said Sanjay Jha, chief executive of Globalfoundries Inc., which manufactures chips to order for other companies.

Mr. Jha and others executives say they are responding by adopting new materials and manufacturing techniques, inspired partly by the possibility of new demand for a widening array of connected devices, which may need chips with different capabilities than they have developed in the past. That emerging market, known as the Internet of Things, may require chips that cost less than $1 and operate for years without a battery change.

Globalfoundries and rival Samsung Electronics Co. have adopted a technology called FD-SOI that offers power consumption and cost benefits even in chips that don't use the smallest circuitry available today. The technology, which stands for fully depleted silicon-on-insulator, relies on specially prepared semiconductor wafers supplied by the French company Soitec.

Paul Boudre, Soitec's chief executive, said one example of the benefits has come from Sony Corp. The Japanese tech company recently designed a GPS chip for smartphones based on FD-SOI that uses one-tenth the energy of prior chips, allowing the location-tracking technology to be used more often without sapping a smartphone's battery, he said.

At the same time, giants like Intel Corp., Taiwan Semiconductor Co., Samsung and Globalfoundries continue to try to pack more transistors on each small square of silicon. The pace of miniaturization has lengthened lately from the established two-year cadence known as Moore's Law, after Intel's co-founder, because of technical and financial challenges.

But smaller transistors are seen as essential in some high-volume chip markets and fields where high performance is necessary, such as data center gear and machine-learning applications such as autonomous cars, Mr. Jha said.

Some companies are beginning to squeeze more out of chips without manufacturing smaller transistors. Makers of NAND flash memory, used to store data in most mobile devices, instead have begun boosting capacity by stacking many layers of circuitry in an approach called 3-D NAND.

The technology shift requires spending on different manufacturing tools, producing benefits for some suppliers. One of them is Applied Materials Inc., which recently attributed a surge in orders to three factors: 3-D NAND, demand for displays and China's efforts to boost domestic chip manufacturing -- all of which it expects to continue to gather momentum.

Applied's stock is up 35% since the beginning of the year. "I think we are in the early innings of these big waves," said Gary Dickerson, Applied's chief executive officer.

SEMI, which is hosting the annual Semicon West trade show this week, is predicting that spending on equipment will rebound to rise 11% in 2017 as some technology trends accelerate. Another factor is that companies continuing the race to shrink chip circuitry will need to buy new tools.

One long-awaited development is a successor to current lithography equipment that uses photographic processes to define features on chips. ASML Holding NV, the biggest maker of those tools, estimates it has spent $7 billion to develop equipment capable of fabricating smaller circuitry by using a technology called EUV, for extreme ultraviolet.

ASML Chief Executive Peter Wennink said Monday that, after many delays, he expects chip makers to be using the technology by the end of 2018. But it remains unclear whether EUV will pave the way for what may be the next major leap in production technology: the ability to manufacture chips with circuitry as small as 7 nanometers, or billionths of a meter, compared with 14 nanometers for today's most advanced chips.

"The jury is still out," said Luc Van den hove, chief executive of the Belgium-based chip research center Imec. "It is a pretty hot topic at the moment."

Write to Don Clark at don.clark@wsj.com

 

(END) Dow Jones Newswires

July 12, 2016 17:30 ET (21:30 GMT)

Copyright (c) 2016 Dow Jones & Company, Inc.
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