The roller coaster continues. The chip industry faces uncertain times after a year of recovery from the worst slump in its history. The industry enjoyed a banner year in 2000 (more than $200 billion in sales worldwide), but then the bottom dropped out in 2001 -- and stayed dropped out through 2002 and much of 2003. By just about any measure, the decline was the sharpest in the history of the industry: global semiconductor sales plummeted to less than $160 billion in 2001 and again in 2002. Weak sales for all kinds of electronics gear, from PCs to cell phones to networking equipment, meant soft demand for the chips that make them work. Particularly hard hit were makers of chips for communications equipment and of DRAMs (dynamic random-access memories) -- a key type of memory used in virtually all PCs and servers. Numbers were a little better for 2003 (industry revenue was about $180 billion) and better yet for 2004 (about $220 billion). But a variety of factors, from the economic to the geopolitical, have made the industry's near future hard to forecast.

Volatile swings are nothing new for the chip business, which has gone through boom-and-bust cycles for decades. The integrated circuit (IC) was developed in 1958, concurrently at Texas Instruments (TI) and Fairchild Semiconductor. Today, semiconductors lie at the heart of ongoing advances across the electronics industry. By far the largest chip company is Intel, which makes about as much money from chips as its next three competitors combined. Intel is the top maker of microprocessors -- the "brains" of PCs and other computers -- and a top supplier of flash memories, which are used for long-term memory functions such as allowing cell phones to remember favorite numbers. Advanced Micro Devices (AMD), while not among the dozen largest chip companies in the world, is nonetheless well-known as a perennial also-ran to Intel -- it is a distant second in microprocessors, though it has gained on Intel in flash memory. The legendary and bitter rivalry between the two companies became even more intense in the past couple of years when AMD finally began to make some inroads into Intel's seemingly unassailable microprocessor market share. After giving back most of those gains when Intel cut prices and stepped up its manufacturing schedule, AMD has launched new sallies thanks to its own timely product releases and Intel's untimely -- and uncharacteristic -- missteps.

Even Intel knows that PCs won't fuel the chip industry forever, so it has made forays into other areas, especially communications. Outside of its stronghold in microprocessors, Intel has plenty of company from the other titans of the chip world: US rivals TI (a top maker of analog chips and digital signal processors) and Freescale (which spun off in mid-2004 from Motorola); Asian giants Toshiba, NEC, Renesas (formed from the chip operations of Hitachi and Mitsubishi), and Samsung Electronics (the world's top maker of memory chips); and European kingpins STMicroelectronics, Infineon, and Philips.

Many chip makers, including some of these giants, have begun to outsource more and more of their production. Cutting-edge chip production is hugely expensive, and building a new fab (chip fabrication plant) has gone from pricey to prohibitive -- price tags run well into the billions -- for even some of the largest companies. Many chip makers, including big ones such as Broadcom and Xilinx, are completely "fabless" -- that is, they don't physically produce chips at all, focusing their efforts instead on design and marketing.

All of these companies increasingly rely on foundries, dedicated contract manufacturers whose focus on the physical production of chips allows them to sustain the massive investments needed to keep up with the latest in manufacturing technology. The field was pioneered by Taiwan Semiconductor, and is dominated by it and neighboring archrival United Microelectronics. The largest US-based foundry service belongs to none other than IBM -- which also is a top chip maker in its own right. Fast-growing newcomer SMIC may point the way to a future in which mainland China vies with Taiwan for preeminence in the foundry business.

As go the chip makers, so go their suppliers. The early 2000s downturn for chip makers was even worse for chip equipment makers: while chip companies spent nearly $50 billion on production equipment in 2000, the radical slump cut worldwide expenditures to less than $30 billion in 2001, and less than $20 billion in 2002. (Industry revenue held steady at around $20 billion in 2003.) Despite the downturn, industry juggernaut Applied Materials has banked on the next boom by continuing to pump money into development of cutting-edge equipment. Applied and its rivals are pushing the performance envelope with gear that etches ever-tinier circuits (allowing more features to be packed onto each chip), processes more advanced materials (producing chips that run faster, cooler, or with less energy consumption), and handles larger wafers (lowering the cost of production per chip).