The fate of Detroit's auto makers, facing possible bankruptcy, will have repercussions at semiconductor makers in Silicon Valley, Texas, Europe and Asia.

The automotive sector has become increasingly important for chip companies as software and technology merge with traditional car operations and consumers seek more electronic diversions while they travel. Automotive sales represent only a sliver of total semiconductor revenue, but as the Big Three car makers contemplate their futures and large foreign makers suffer through the global downturn, companies that supply them with chips are likely seeing a traditionally small but steady sales channel falter.

"It's a relatively small part of their business overall," Needham & Co. analyst Quinn Bolton said. "But clearly weakness in the auto industry is going to hit the semiconductor industry."

While many semiconductor companies sell chips to the auto industry, those with a larger exposure in the U.S. include Texas Instruments Inc. (TXN) and privately owned Freescale Semiconductor Inc. Infineon Technologies AG (IFX) and ST Microelectronics NV (STM) sell more to European car makers. Japanese manufacturers often turn to NEC Electronics Corp. (6723.TO) and unlisted Renesas Technology Corp.

Bolton expects TI to generate roughly $500 million in revenue from its automotive segment in 2008, out of a total revenue base of about $12 billion.

Texas Instruments didn't respond to requests for comment.

Overall sales have been declining for chips used in cars and trucks throughout the wider economic downturn, but the situation is quickly worsening.

In 2007, revenue for chips used in the automotive segment was $20.5 billion, according to research firm Gartner. Earlier this year, Gartner's automotive chip analyst Mike Williams was expecting 2008 sales to grow, slightly, to $20.9 billion. Now, Williams said, he expects a decline of roughly 4% to about $19.8 billion; meanwhile, the market continues to deteriorate.

"In 2009, we'll be looking for a decline. We'll be lucky to see a 10% decline in this market," Williams said.

For most chip companies, the drops in share prices over the past year have been much larger. Shares of analog chip giant TI has fallen more than 53% over the past 12 months. ST Micro is down 58% from last year, and Infineon - dragged down by its Qimonda AG (QI) memory business - has fallen 93% and trades below $1.

TI shares were recently up 2.8% to $15.56. ST Micro was up 1 cent to $6.56 and Infineon was down 2 cents to 88 cents.

Chip companies are feeling the most pain from the drops in demand for consumer electronics, which represent the majority of total chip sales. According to Gartner, automotive semiconductors account for only roughly 7% to 10% of the total chip market.

But auto weakness adds another industry - one that used to act as a ballast to the ebb and flow of other segments - to the list of declining areas for chip revenue.

"It certainly used to be that automotive was a steadier business for these guys that did have exposure," Needham's Bolton said. "Having auto exposure used to be seen as a positive."

"In this kind of market, auto is not going to be perceived as an area of relative safety," he said.

Of course, the situation of most chip makers doesn't compare to that of the Big Three U.S. auto makers.

Late Thursday, senators failed to reach agreement on a proposed $14 billion government rescue plan to halt a possible collapse of General Motors Corp. (GM) and Chrysler LLC. In addition, GM said that it is shutting most North American assembly plants for about 30% of the first quarter, according to The Detroit Free Press.

Foreign car makers, while less financially shaky, are also struggling. Honda Motor Co. (HMC) said Friday that it was again cutting North American production. A week ago, Toyota Motor Corp. (TM) announced more production cuts, as well.

Analysts say the industry is also suffering from a congested sales channel. As inventories pile up due to low demand, suppliers are left to watch sales fall.

"The dealerships are full of inventory at the moment and the automotive manufacturers also have very full car parks full of vehicles... it means that there is really nowhere to build cars and put them," Gartner's Williams said.

"The channel has become clogged," he said.

-By Jerry A. DiColo, Dow Jones Newswires; 201-938-5670; jerry.dicolo@dowjones.com

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