The semiconductor industry should see a significant increase in revenue this year - but may see growth slow down next year, reports analyst The Gartner Group.

Chip vendors should take in $226 billion in revenue this year, an increase of 27 per cent compared to 2003, said Richard Brown, research vice president for Gartner. But revenue growth will slow considerably next year to between five and 10 per cent, and could possibly contract in 2006, he said.

Gartner feels that 2004 has been a very strong year for chipmakers, but the industry can't sustain a 27-per cent growth rate as the PC replacement cycle wanes in 2005, he said.

Lesson 1: Demand and supply

"We believe we're entering a fairly traditional semiconductor cycle. Each cycle is different, but they are created by imbalances between supply and demand," Brown said.

Chipmakers have invested billions of dollars in new manufacturing plants and technologies, which will increase the supply of chips just as demand starts to slacken toward the end of next year, Brown said. This will cause prices to soften amid a glut of inventory, he said.

Rising inventories among chipmakers have concerned financial analysts over recent weeks. These rising inventories are normal in a situation where demand is still strong, but will cause problems if demand does not keep up with the increase in supply, he said.