Chip Foundries Struggling To Meet Product Demand
Date: 8/11/99
Author: James DeTar
Business is good for third-party chip manufacturers. Maybe too good.
Taiwan Semiconductor Manufacturing Co. , the largest company that makes chips others design and sell, says its factories are running at 103% of capacity.
How is this possible? Chipmakers ''rate'' their factories at the capacity at which they're most efficient. With fine-tuning, explains TSMC spokesman Chuck Byers, the plants can run ''a bit'' over 100%.
At 100%-plus, TSMC has to struggle to make enough chips to meet all of its customers' demands. The situation is a big turnaround. As recently as April, TSMC was running at just 75% of capacity.
Things are heating up fast in the chip industry, says Sue Billat, an analyst at researcher BancBoston Robertson Stephens Inc. PC sales are rising as prices decline and the Web grows, while Asian economies are improving.
''You have to worry whether there's enough manufacturing capacity to meet the needs of PC makers,'' she said.
A spokesman for United Microelectronics Corp. , another large Taiwan foundry, says UMC's factories are running at 100%.
As factory space gets scarcer, it also gets more expensive. This could force chip prices higher, hitting PC makers and buyers in the wallet.
One effect of the capacity crunch already is evident: Foundries are spending more money for new factory space and gear.
TSMC now says that this year it will spend $1.11 billion on buildings and gear, up a third from the $830 million figure it estimated at the start of the year.
The increase mostly will be used for additional gear at its new Fab 6 plant, in the Tainan Science Industrial Park in Taiwan. That chip-making facility, called a fab, or fabrication plant, is expected to come online around February, Byers says. TSMC plans to add a seventh fab at the park within a few years.
The company also plans to spend $86 million more than it expected, a total of $265 million, at its WaferTech foundry in Camas, Wash. WaferTech is a joint venture funded mostly by TSMC and Philips Electronics NV, with some investment by San Jose, Calif.- based chipmaker Altera Corp.
The chip turnaround began in earnest in the fourth quarter, say people in the industry. But then TSMC's first-quarter sales surpassed fourth-quarter sales by 40%. ''It was unbelievable,'' Byers said.
And demand has hardly slackened. TSMC's second-quarter sales surpassed first-quarter sales by 38% and beat year- ago sales by 48%.
The fast growth is forcing changes at UMC. On July 14, the company said it's combining all four of its Taiwan units to help free up funds for expansion. UMC says it's been growing at a rate of 45% a year, and that it's more economical to run the four units as one.
There's been a reversal, and now demand exceeds supply, UMC Chief Executive John Hsuan said in a statement last month. ''And supply will get progressively tighter in 2001,'' Hsuan said.
On July 15, UMC revealed plans to build a new chip plant in the Tainan science park. The company expects to spend some $3 billion on that plant, more than any company has ever spent on a single chip plant. The new factory is expected to make next-generation 12-inch wafers, which should be more efficient than today's eight-inch standard because more chips can be cut from the larger wafers.
Some large chip companies are fabless, so they depend entirely on foundries to make their products. These chipmakers include market leaders like Xilinx Inc. and S3 Inc. But weaker fabless chipmakers could face troubles if foundries hike prices.
The situation affects all chipmakers. As sales of chips have risen this year, companies such as Intel Corp. and Advanced Micro Devices Inc. have seen pressure build to beef up their factories, which can cost billions of dollars.
There's another worry for chipmakers, analyst Billat points out. The rise in chip sales is occurring as chip equipment makers are still trying to shrug off one of that industry's biggest downturns. During a two-year lull ended late last year, gear makers cut their spending.
That means it could take awhile for gear makers to get up to speed in supplying chipmakers what they need, she says.
''A lot of equipment companies used the downturn to skinny down,'' Billat said.
The largest chip-gear maker, Applied Materials Inc., last year cut some 2,000 jobs, or 16% of its work force.
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