Just As Industry Speeds Up, Chip-Making Plants Fill Up
Date: 4/28/99
Author: James DeTar
Storm clouds are gathering for some chipmakers because manufacturing capacity is drying up.
And the problem is surfacing sooner than most of the 210 members of the Fabless Semiconductor Association anticipated, fears Chairman Dave Angel. These companies design and sell chips but rely on other companies -called foundries - to actually make them. The work is done in facilities called fabs, short for fabrication plants.
''I'm worried,'' Angel said. ''We could be in a capacity-constrained situation.''
Analysts have cautioned that a capacity shortage could develop in a few years, but Angel says he'll report at Thursday's annual association meeting that the situation is more urgent.
This is new. In recent years, there's been more than enough chip-foundry capacity. This was so despite a big 1997 fire at United Microelectronics Corp. UMC, of Taiwan, is the No. 2 foundry, with about 14% of the market. Taiwan Semiconductor Manufacturing Co. is the largest foundry. It posted sales of $1.42 billion in 1998 and controls about a third of the market.
''More than a few'' association members already have reported problems finding foundries that can supply them with all the chips they want, Angel says.
Most of the large chipmakers, such as Intel Corp., make most, if not all, of their own chips. But some midsize chip companies, such as S3 Inc. and Xilinx Inc., rely entirely or heavily on foundries.
Last summer, during an industry lull, foundries were running at only about 65% of capacity, says Dennis Segers, a senior vice president at Xilinx. Now, ''they're pretty much maxed out,'' he said.
But Segers says a big company like Xilinx won't have worries. That's not so for others. ''I would hate to be a new, emerging fabless semiconductor company trying to scrap for capacity,'' Segers said.
Many factors have converged to create the situation. For one, there's Asia's recession. Many fabs there have postponed or canceled expansion projects.
Some chipmakers also have shelved expansion in the face of last year's slowdown. They include Siemens AG and Motorola Inc. As a result, these companies will seek to get more of their chips made by foundries.
A foundry-capacity shortage will develop by late next year, says Clark Fuhs, an analyst with market researcher Dataquest Inc. But he says that's no big deal.
Why? Because many foundries have taken in a lot of extra work from Japanese memory- chip makers. Memory ideally is at most 10% of the mix for foundries, Fuhs says, because it gives the fabs low profit margins. But with last year's slowdown, that percentage rose to 25% or more, he says.
Now, with more need for other chips, foundries simply will dump some of their memory business, Fuhs says.
The industry isn't as confident as Fuhs, however. There's enough capacity to avert any shortage now, says Bulent Celebi, chief executive of Scenix Semiconductor Inc. But ''if (demand) goes up 30%, clearly there could be some limitations,'' he said.
There's one unique factor to the current situation. Foundries could find themselves getting a big influx of orders if chipmakers look to stock up on inventory before the year 2000. Some computer systems might fail when the calendar moves from the 1900s to the 2000s, potentially crimping supplies for any number of products.
Yet another factor for foundries is that a new set of customers has emerged. Some companies that do their own chip manufacturing are giving more work to outside foundries, Angel says. Those companies include IBM, Motorola and Analog Devices Inc.
Bob Bailey, chief executive of fabless chipmaker PMC Sierra Inc., agrees that more companies seem to be contracting out more chip manufacturing to cut costs.
He notes that there are only a few large foundries. ''It's going to be tough for just two or three guys to meet the world's supply needs,'' Bailey said.
(C) Copyright 1999 Investors Business Daily, Inc. |
