It'll take more than a Handspring (HAND) Visor to get the semiconductor sector organized in 2001.

Flash-memory intensive applications like the handheld digital assistants such as the Visor and the

Palm

(PALM)

Pilot

, as well as increasingly complex cell phones and digital audio players, helped keep chip affairs from falling apart during the latter half of 2000 as personal computer growth slowed. It's flash that makes these techie toys go. Unlike other kinds of memory, flash is able to retain its data when a device's power is instantly shut off, making it useful for these devices.

For part of 2000, flash was in so much demand that manufacturers couldn't make enough, but that's no longer the case. Both

Intel

(INTC) - Get Report

and

Atmel

(ATML)

have capacity coming on line early this year. On the demand side, an economic slowdown appears so imminent that the

Federal Reserve

cut interest rates unexpectedly last week. Combine that with slowing PC sales -- demand for PCs failed to materialize in the latter half of 2000 and PCs use some low-end flash memory -- and it becomes clear the near 130% growth in the flash market in 2000 isn't likely to occur in 2001. Scottsdale, Ariz.-based

IC Insights

sees flash growing 38% in 2001.

But while flash may be growing more quickly than the rest of the semiconductor industry -- which IC Insights expects to grow only about 7% this year -- it represents only a small part of the overall market. In 2000, chip sales totaled about $176 billion, of which just over $10 billion was flash. Intel and

Advanced Micro Devices

(AMD) - Get Report

accounted for about 75% of the flash business.

For Intel, a strong flash market can help the bottom line, but at current levels, not save it. It accounts for only a minor amount of the $33 billion in revenue analysts expect it to bring in this year, according to

First Call/Thomson Financial

. For a company like

Sandisk

(SNDK)

, however, the flash market has an even bigger impact because it makes only flash products.

Hope

Chipmakers have been looking to flash for strength as demand for other chips -- like commodity DRAM, or dynamic random access memory -- has waned. For instance, when

Micron Technology

(MU) - Get Report

said last month that revenue fell on lower DRAM prices, it also said that flash was strong and would help it in the future.

But it may not be a cure-all. There are signs that demand has already begun to wane and that pricing of certain flash memory is under pressure.

Jim Coleman, an analyst at

Fechtor Detwiler

, a Boston brokerage firm, says inventories of 16-megabyte flash at distributors is growing. (Chip companies often sell to contract manufacturers and/or distributors, which then sell to the final customers.) A couple of months ago, a 16-megabyte chip sold by distributors was going for $16. But because there wasn't enough to go around, Coleman says, third-party brokers were selling it for up to $40.

Now distributors like

Arrow Electronics

(ARW) - Get Report

and

Avnet

(AVT) - Get Report

are selling 16-meg flash for $10, he says.

But the high-end products, like 32-megabyte and 64-megabyte

StrataFlash

from Intel, are still hard to get. Unlike the 16-megabyte flash, often used in cell phones, the 32- and 64-megabyte memory are used in digital audio systems, handheld assistants and set-top boxes. Intel, for instance,

plans to sell a digital audio player that can play up to four hours of music. To get those four hours of playtime, it uses 128 megabytes of its StrataFlash memory.

More Power Please

Atmel, a chipmaker that derives about 30% of its revenue from flash, says even cell-phone makers want high-end chips now. John Bryant, vice president of marketing, says cell phones that used 16-megabyte chips are upgrading and have already been switched to 32 megabytes. "By the end of this year, the phones will go over to 64. Some phone guys have asked us for 128," Bryant says.

He hasn't seen inventories of 16-megabyte chips building up, but says, "I've seen a little bit of transition as the phone guys are moving from 16 to 32." Digital cameras also use 32-megbyte chips, while digital set-top boxes for cable and satellite transmission that have traditionally used four of the 16-meg chips are moving to four of the 32-meg chips, he says.

In terms of capacity, Atmel is starting up two recently acquired factories and continues to ramp up one in France. Its Irving, Texas, plant will start shipping products in the second quarter, and in the U.K., it will start shipping in the third quarter.

Meanwhile, the largest maker of high-end flash, Intel, is building out its Colorado location, which will put out products this quarter. The second half of the plant will begin production in the next two to three years, according to an Intel spokesman. Advanced Micro Devices and partner

Fujitsu

also make flash.

Sharp

makes flash in partnership with Intel and

STMicroelectronics

(STM) - Get Report

is also a large player. Much of the low-density flash, the 4-megabyte variety, is made in Taiwan, where inventories are building because of the slowdown in PC demand, according to Bryant, who said he's not convinced this slowdown will last.

There's More

Other companies like Sandisk and

Silicon Storage Technology

(SSTI) - Get Report

also make versions of flash memory.

But while capacity may be an important issue, the real question for flash in 2001 may be whether the U.S. is teetering on the edge of a recession.

"If spending for consumer electronics declines and people aren't buying as many cameras or handsets or Palm Pilots, you'll see a decline, whether it's the purchase of flash-memory cards or flash-memory components," says Brian Matas, vice president of market research at IC Insights.