Internet & Technology
Monday, June 25, 2001
Chip Foundries Enjoy A Boom
Despite glut of manufacturing capacity, new factories are opening overseas
By James DeTar
Investor's Business Daily
The timing seems curious.
Chip sales are in a slump. There’s a glut of chipmaking capacity. And no one’s sure there’s an end in sight.
Yet a couple of new semiconductor foundries are getting started. What’s more, they’re not in Taiwan, the traditional home of chip contract manufacturing – they’re in South Korea and Germany.
Analysts say the new plants make sense. They’re part of an industry move toward outsourcing. Chipmakers are contracting out their manufacturing to independent chip foundries.
Foundries now make some 10% of all chips. Research firm Gartner Dataquest Inc. expects the number to pass 50% by 2012. In the process, foundries will expand beyond the cramped confines of Taiwan.
“They’re out of land, power and water in Taiwan,” said Sue Billat, an analyst at Robertson Stephens Inc. in San Francisco. “The number of chips made by foundries is going up, and that’s leading to globalization.”
Two foundry upstarts – Dongbu Electronics Co. and Communicant Semiconductor Technologies AG – are banking on that trend. Dongbu has opened up a plant in Seoul, South Korea, and Communicant is building one in Frankfurt, Germany.
The reason for the growth of foundries is simple. As chipmakers embrace more sophisticated technology, it’s getting very expensive to build new chip plants.
The industry is starting to make chips out of 12-inch wafers, instead of 8-inch wafers. That lets chipmakers squeeze 2 1/2 times as many chips onto each wafer, but it means a costly upgrade of equipment.
Defraying Upfront Costs
The cost of building new 12-inch wafer plants is about $2.5 billion each. That’s where foundries come in.
One foundry can support any number of chip firms, helping defray upfront costs. According to Credit Suisse First Boston, foundry revenue will grow from $5.2 billion in 1999 to more than $25 billion by 2003.
The strategy of both Dongbu and Communicant is to offer customers the latest manufacturing technology. Communicant hopes to do especially well with developers of communications chips.
“Our proprietary technologies and intellectual property will position Communicant as the world’s leading communication-focused foundry,” said Klaus Wiemer, chief executive of the German company.
Dongbu and Communicant have many things in common. Both enjoy the support of their governments. And both are starting out by using other companies’ manufacturing techniques.
Communicant will rely on Intel Corp. (INTC) technology. Dongbu Electronics is using Toshiba Corp.’s.
With the launch of these companies, the foundry business is going global. Until recently, almost all of the world’s chip foundries were in Taiwan. The island nation still dominates the field, as it’s home to the largest foundry, Taiwan Semiconductor Manufacturing Co. (TSM), and others.
The new foundries plan to compete with the Taiwanese, and soon the mainland Chinese, who are spending billions of dollars to build their own chip plants.
Dongbu Electronics is South Korea’s second chip foundry. Its first – Anam Semiconductor Inc. – has mostly made chips for Texas Instruments Inc. (TXN)
According to Wesley Min, Dongbu’s chief operating officer, conditions in South Korea are ripe for a new foundry.
South Korea has been making chips for 30 years, thanks to its memory chip companies. So there’s lots of chipmaking know-how, Min says.
The government supports Dongbu, in part because it wants to see production of other kinds of chips. Memory isn’t very lucrative anymore.
“Korea has an unbalanced semiconductor industry,” Min said. “Eighty percent of its product is memory chips.”
Dongbu won’t get money from the government, but it will get indirect help. For example, foreign investors in Dongbu don’t have to pay taxes on their returns for seven years.
Min says the company is making about 300 wafers a month right now. It plans to grow to 45,000 wafers a month over the next couple of years.
Dongbu Electronics is a spinoff of Korean conglomerate Dongbu Group, a $7 billion company with holdings in electronics, construction and finance.
The start-up is spending $2 billion to get off the ground, says Peter Hillen, the company’s vice president of worldwide marketing and sales.
It raised $440 million in its first round of financing and hopes to raise another $310 million by the end of 2001. Loans will cover the rest of the start-up costs.
Halfway around the world, Communicant aims to be Germany’s first foundry. The factory, which is backed partly by Intel, will cost $1.5 billion. It’s still in the early stages, though, and won’t be open until 2003.
Waiting List
It’s a good time to start a chip plant, says Communicant’s Wiemer. For one, it’s easier to get equipment in a slow economy.
“We’re going to spend about $1 billion on semiconductor process equipment,” in the months ahead, Wiemer said. There was a waiting list of 24 months for some chip gear last year. This year, gear makers are fighting over orders.
“If I called today, they would say, ‘When would you like it?’ ” Wiemer said. “And getting favorable prices in terms of building a factory – I don’t think we could have picked a smarter time.”
But even as foundries grab a bigger share of the chipmaking pie, new semiconductor plants are always a gamble. And this is one of the worst years ever for chip sales.
If the chip market doesn’t turn around later this year or in 2002, Communicant and Dongbu could find they’re pouring money into a bottomless pit.
Several chipmakers issued sales and profit warnings recently. Among them: General Semiconductor Inc. (SEM), Texas Instruments, Infineon Technology AG (IFX) , Transmeta Corp. (TMTA) and Philips Electronics NV. (PHG)
Still, that could be an advantage for Communicant and Dongbu. Many chipmakers may slash budgets so much that they won’t be able to meet demand during a recovery. Some may then turn to foundries.
That’s the game plan of the two new foundries, analysts say.
“Their strategy is to get up and running during a slow period, so when business recovers they will be in a position to take advantage of it,” Billat said.
-------------------------------------------------------------------------------- |
