Wednesday July 12 11:30 PM ET
Sharp Demand, Short Supply Boost
Asia Chipmakers
By Tony Munroe
HONG KONG (Reuters) - Investors see huge opportunity
in the Asian semiconductor industry as Internet
applications, mobile phones and silicon-reliant appliances
suck up chip-making capacity faster than they can be filled.
``Technology has become the status symbol of consumption
today,'' said Robin How, managing director of A.P.C.
Asset Management (Hong Kong) Ltd, who remains bullish
on the boom-and-bust prone sector.
``Even if there's a slowdown in demand, you're going to
operate at 99 percent capacity instead of 100.''
After a worst-ever industry slump that ended in 1998,
times have vastly improved for Asian semiconductor
makers, where lead times for capacitors and flash memory
chips have extended to as much as 18 months. Prices and
profits have risen accordingly.
Global chip sales reached a record US$15.8 billion in
May according to the Semiconductor Industry Association,
a nearly 40 percent increase from a year earlier.
In Asia excluding Japan, chip sales saw a 45.8 percent
year-on-year boost in May, while Japan enjoyed a 43.6
percent sales surge. With sales totaling US$7.57 billion in
May, Asia, including Japan, accounted for nearly half the
world's semiconductor sales, according to the SIA.
``The demand is looking good,'' said Adrian Fu, portfolio
manager with Investec Guinness Flight Capital in Hong
Kong, who predicts the current up-cycle for semiconductor
makers would be longer than usual given the diversity of
demand.
The present chip cycle is the industry's ninth. The previous
cycle saw an upturn from 1992 through 1995, followed by
a slowdown that lasted into 1998, according to Chase
H&Q.
One reason supply so sharply lags demand is that during
the Asian financial crisis -- which occurred during the
chip sector's last cyclical downturn -- no new capacity
was built in Korea or Japan, Chase H&Q said. Long lead
times and immense expense prevent new plants from
quickly coming online to meet demand.
Some Naysaying
But the upbeat sentiment isn't universal. Salomon Smith
Barney roiled the chip world last week with a report
downgrading the industry to ``neutral'' from ``outperform''
based on what it called ``slowly reversing industry
fundamentals'' and slight decline in cellular phone growth
and surge in capacity.
Many came to the industry's defense.
``So what?'' asked How. ``You've got PDAs (personal
digital assistants) coming through, you've got in-car
navigation systems, all of which use up chips instead ...
DVD (digital video disc) sales are mushrooming this
year,'' he added.
While demand from PCs accounted for nearly half the chip
output during the previous cycle peak, they account for just
25-30 percent of present demand, analysts said. Mobile
phones account for just 10 percent of demand, analysts
said.
Merrill Lynch, which recently reiterated its ``buy'' rating
on the chip sector, forecasts 420-440 million cell phones
will be sold this year with a 21 percent surge in PC unit
sales.
Some analysts had earlier predicted wireless handset sales
would reach an astounding 500 million units this year.
Merrill Lynch Asian semiconductor analyst Dan Heyler
said supplies of semiconductor silicon are expected to
grow by 23-25 percent this year with revenue rising by
32-36 percent. The difference, he wrote in a recent report,
is higher prices.
Morris Chang, chairman of Taiwan Semiconductor
Manufacturing (2330.TW) (NYSE:TSM - news) (TSMC),
the world's top chip foundry, or made-to-order chipmaker,
recently said, ``I can't say that semiconductors are no
longer cyclical but think the best and most bountiful part of
this cycle will come at the earliest in mid-2002.''
Records Breaking
In Korea, where last year Samsung Electronics
(05930.KS) and Hyundai Electronics Industries
(00660.KS) made 40 percent of the world's workhorse
dynamic random access memory (DRAM) chips used in
personal computers and other appliances, semiconductor
exports are expected to reach a record US$25 billion this
year -- an increase of 23.1 percent.
In Taiwan, home to the largest semiconductor foundries,
executives say consumer-driven demand is helping to
mitigate the industry's historic cyclicality.
``The beauty of this demand is that it's like a fashion thing,'' said Peter Chang, chief
executive of foundry operations at number two Taiwan chipmaker United
Microelectronics Corp (2303.TW). ``People keep on changing their phone. I've
changed three phones already this year.''
Japanese chip-makers, scorched by an overreliance on price-volatile DRAM when
the last semiconductor boom turned to bust, have turned to higher-end multi-function
chips as well as flash memory devices used in mobile phones.
Three of Japan's five largest chipmakers -- NEC Corp (6701.T), Fujitsu Ltd
(6702.T) and Mitsubishi Electric Corp (6503.T) -- recently boosted capital
spending outlooks for this year to a record 904 billion yen in order to meet added
demand.
Hot Dram
Investec Guinness Flight's Fu said he likes DRAM makers in particular because of
rising prices caused by tight supply and demand from PC upgrades, other Internet
access devices, MP3 music players and digital players.
``All those are creating new demand for DRAM,'' he said, citing both Samsung and
Hyundai Electronics Industries as attractive.
Merrill's Heyler rates Chartered Semiconductor Manufacturing (CSMF.SI)
(NasdaqNM:CHRT - news) and TSMC as buys, and How of A.P.C. Asset favors
microprocessor and chipset maker VIA Technologies (2388.TW) as well as
microchip firm ProMos Technologies (5387.TWO).
Analysts note no major surge in new capacity is imminent, with plants set to slowly
come online over the next 18 months.
How said industry fundamentals continue to look solid: ``The valuations are
vulnerable more than the actual fundamentals,'' he said. ``The world's gone digital.
And the core ingredient is what? Chips.''
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