Since the invention of the integrated circuit in 1958, the number of processing steps required to make one has grown from less than 10 to several hundreds. At the same time, the silicon wafers on which the ICs are produced have gone from being coin-sized to being dinner-plate-sized.

Today, one of these 300-millimeter wafers can yield more than 700 ICs. And that, for a growing number of chip makers, is precisely the problem. With such a large number of ICs coming from a single wafer and with wafers coming off manufacturing lines at rates of tens of thousands a month, companies can quickly find themselves suffering from chip glut, especially in turbulent markets.

For the past five years, since the bursting of the dot-com bubble in 2000 sent semiconductor sales into a tailspin, the industry has been struggling to rid itself of excess inventory. In the second quarter of 2001, the entire supply chain, including chip makers, distributors, contract manufacturers, and consumer-product manufacturers, was stuffed with an excess of chips worth more than US $13 billion, according to some estimates. Companies stopped hiring new employees and laid off existing ones. As a result, semiconductor industry jobs in the United States alone dropped from 268 000 in 1999 to 235 100 in July 2003, according to the U.S. Department of Labor. As recently as the third quarter of last year, chip oversupply was still at a worrisome $1.6 billion, according to a preliminary analysis by iSuppli Corp., a research firm in El Segundo, Calif. [see graph, "Swimming in Chips"].

Clearly, the semiconductor industry is still facing serious problems as it claws its way back toward profitability and sustained employment growth. And for economic and technological reasons, the relentless drive toward faster, cheaper, and smaller chips is a growing problem.