The rating's agency said in a new study, "Asia's High-Technology Industry Review: Where is the Cycle heading?," that while some sectors had performed well it remained unclear whether the recent pickup could be maintained.

S and P noted that South Korea's Samsung Electronics, the world's largest memory-chip maker, had recently reported second-quarter net profits had slumped 41 percent from a year earlier due to weak chip prices and a slowdown in mobile phones sales as an example of continued volatility in the sector.

"The strength of the overall economy is a critical factor for the pace of recovery," said Standard and Poor's director John Bailey.

"When the US economy picks up, companies will resume capital spending and you will start to see widespread adoption of next generation IT equipment," he said.

The second half of 2003 will likely see only moderate growth before demand outstrips supply, leading to a rise in chip prices and improved sales sometime in 2004, he added.

Bright spots in Asia's technology sector were strong outsourcing trends and growth in mainland China's information technology industry, reflecting its production cost advantages and rapidly growing consumption of electronic goods in the country.

Howvever, rough spots in Asia's technology sector included the dynamic random access memory (DRAM) sector and Japan's electronic's industry.

"Chip prices have risen in recent months but most manufacturers are still struggling to bring their costs into line with their weak revenue levels and are relying heavily on an expected recovery to generate sufficient profitability to fund working capital and capital spending," said Bailey.

In Japan, integrated electronics companies were struggling with reforms and despite some pick-up in results, continued to experience weak cash flow protection measures.

Standard and Poor's noted that the technology sector remained one of the most volatile industries, haunted by large bankrupticies and occasional tight liquidity.

"Creditors should be aware that the non-investment grade default rate could deteriorate over the next three years, which is about how long it takes for such companies to get into trouble," said Bailey.

SPACE.WIRE