CHIP MAKERS FEEL CHANGE IN SEMICONDUCTOR BUSINESS

July 14, 2000

COMMERCIAL NEWS

Taipei, TAIWAN — Michael Kramer reports that from their perch at the top of the semiconductor production chain, microchip makers are feeling a sea change come over the business as silicon moves beyond computers and permeates daily life.

Executives at foundry firms, which make chips to the designs of client companies, say the semiconductor upturn that began in 1999 has taken a more promising path than past boom-and-bust cycles thanks to Internet and telecom demands.

“As soon as we start saying it’s different, we’re in trouble – we’ve overstated our outlook,” cautioned Ron Norris, senior vice president of sales and marketing at Taiwan Semiconductor Manufacturing Co (TSMC), the world’s largest maker.

“But the breadth of the drivers seem much more significant today,” he admitted. “There really does seem to be some level of pervasiveness in this cycle.

“Semiconductor cycles have classically not been in sync with worldwide economic cycles, but we are becoming much more tightly coupled with the consumer,” he told Reuters.

Communications chips accounted for 38 percent of TSMC’s output in the first quarter of 2000, against 33 percent in the third quarter of 1999.

Down the street in Taiwan’s Hsinchu Science-based Industrial Park, TSMC’s arch-rival United Microelectronics Corp (UMC) says communications chips now account for 35 percent of output, up from five percent a few years ago.

Peter Chang, UMC’s chief executive of foundry operations, predicted another three to four years of growth in the chip industry thanks to “a new kind of demand” from consumer products such as mobile phones.

“The beauty of this demand is that it’s like a fashion thing,” Chang said. “People keep on changing their phone. I’ve changed three phones already this year.

“The worst thing is if a product last forever,” he added.

Beyond mobile phones however, foundry executives agreed that new applications such as wireless home networking, the consistent need for Internet infrastructure and the myriad new devices that can surf the web will all drive demand for chips.

“You see a huge demand for the 56k modem or the ADSL modem all the way back to central office switching for a tremendous amount of more bandwidth,” said Kevin Meyer, vice president of business development at Chartered Semiconductor, the world’s third largest foundry.

“That need of bandwidth is certainly driving some exciting new markets,” he told Reuters by telephone from Chartered’s Singapore headquarters.

Higher proportions of communications sales do not just reflect a market trend, however. Foundries have actively courted these firms because of their growth potential and their preference for higher-end designs – which yield higher margins for the manufacturer.

UMC’s Chang said he expected communications clients to migrate completely from 0.35 micron technology to 0.25 micron technology, cramming more transistors on each chip, by the end of the year.

At Chartered, attracting communications customers was part of a makeover that turned the former loss-making company into one of the island’s hottest stocks.

“Over the last year and half, almost two years, we’ve had a very conscious strategy of moving away from the commodity kinds of applications that tend to be memory-focused,” Meyer said.

“So what we’ve seen is that our mix has moved from a commodity memory, PC-centric mix to a more of a communications mix where over half of our sales come from the communications market segment,” he said.

But all this new demand has caused a desperate capacity shortage at chip foundries, making for tough choices between a deluge of orders from both promising new customers and faithful old ones.

“It’s a tough time in the industry overall, in that when you see companies coming in and upsiding their forecasts by three times what they were telling you six months ago, we’re not always able to meet everybody’s expectations,” Meyer said.

UMC’s Chang said his foundry copes with the problem by allowing old, computer-related clients to keep their allocations of precious capacity, but giving new growth over to clients judged to be high-premium and high-potential.

And a lot of new growth is coming on line at UMC. The foundry is in the process of ramping production at two new wafer fabrication plants, and expects monthly output to hit 200,000 eight-inch silicon wafer equivalents by the end of the year, up from 180,000 a month at present.

Norris said TSMC also preferred clients that were seeking to push their microchip performance to the technological edge, no matter what type of products they made. He had little patience for companies that were simply short of their own capacity and hoping to rent some from TSMC.

“We don’t spend much time at TSMC talking to those opportunities. They’re just not interesting to us,” he said.

“The opportunities that are interesting to us are like the ones our Mortorola relationship is characteristic of, where they are trying to address this market trend,” Norris said.

“It’s characterised by what’s happening in communications, in consumer, and really, the other areas of high-performance computing.”

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