From today's WSJ:
Taiwan's Foundries Lead Recovery In the Beleaguered Chip Industry
By DEAN TAKAHASHI and DAVID P. HAMILTON
Staff Reporters of THE WALL STREET JOURNAL
After three years of dismal sales and falling prices, chip makers and their suppliers are starting to see a brighter outlook. But this is an upturn like no other for the industry. The big difference: Makers of memory chips, a huge product category that is subject to major swings in demand and pricing, are mostly still in the dumps. This time, it is Taiwan's foundries, the manufacturers that make chips on behalf of other companies, that are leading the recovery. While foundries still account for a relatively small fraction of overall semiconductor manufacturing, their influence on the industry is expanding rapidly. VLSI Research, a research firm in San Jose, Calif., estimates that foundries accounted for only 8% of the industry in 1998, but expects that foundries could account for 13% of production in just a year or two.
Boost for Chip-Equipment Makers
Suddenly, Taiwanese chip makers are leading buyers of chip equipment,
helping to fuel optimism across that industry. Analysts expect
chip-equipment suppliers to swing back to single-digit growth in 1999 after
seeing sales plummet 24% last year. Global sales of chips are predicted to
rise about 9% in 1999, compared with an 11% drop in 1998.
Applied Materials Inc., the world's largest maker of semiconductor
equipment, illustrates the shift. The Santa Clara, Calif., company said it
expects orders to grow in the fiscal third quarter concluding in the end of
July, thanks to expansions by foundries and microprocessor makers, even
as memory-chip makers continue to struggle. Taiwan, in fact, now
accounts for 25% of Applied Materials' orders, up from less than 20% last
year, said James Morgan, Applied's chief executive officer. Makers of
memory chips called dynamic random access memories, or DRAMs,
account for only 28% of Applied's orders, down from 38% earlier this
year.
"Investors have seen DRAM prices as a leading indicator of the fortunes of
the chip industry," said Terry Ragsdale, an analyst at J.P. Morgan & Co. in
New York. "There are good reasons why that is not the case this time
around."
'Fabless' Companies
One reason is that the chip industry has diversified from its heavy reliance
on the personal-computer market. These days, companies specializing in
chips for communications and consumer-electronics gadgets are soaring,
thanks to the growth of the Internet and an increasing tendency to embed
chips in ordinary products. Many of these companies are "fabless,"
industry parlance for companies that don't have factories and rely on
foundries to manufacture chips they design.
Companies in the category include Broadcom Corp., PMC-Sierra Inc.
and Vitesse Semiconductor Corp., which supply crucial chips for routers
and switches that direct Internet traffic. Wim Roelandts, CEO of Xilinx
Inc. in San Jose, Calif., said that sales of his company's programmable
logic chips into the communications market had doubled in the past year.
He expects that segment's revenues to grow roughly 30% in 1999, up
from just 8% in 1998.
"Communications is the place to be," said John Dickson, group president
of Lucent Microelectronics in Allentown, Pa., a unit of Lucent
Technologies Inc. "We're expecting significant growth throughout the
year."
The picture has changed quickly. Profits fell last year at both Taiwan
Semiconductor Manufacturing Co., the world's largest pure foundry, and
at United Microelectronics Corp., its biggest rival. So did production:
UMC saw its capacity utilization drop to 70% last July, while TSMC's
factories produced at only 58% of capacity in the third quarter.
Indeed, both foundries initially feared 1999 wouldn't be any better. But
those worries soon dissipated. TSMC, for instance, recently boosted its
capital expenditure plans for the year to $1.3 billion, up from the $715
million it scheduled last December. UMC also plans to invest $1.3 billion
this year, the same as last year.
Leading-Edge Production Lines
One of the foundries' key achievements has been to upgrade their
production technology to leading-edge levels after years of lagging behind.
Both TSMC and UMC have recently unveiled production lines that can
produce chips with features as small as 0.18 microns, only 1/500th the
width of a human hair -- a feat that even mighty Intel Corp. managed only
recently.
In effect, that has turned foundries from manufacturers of low-tech,
low-priced chips to sources of cutting-edge technology. Even some of
today's established chip makers have turned to foundries for manufacturing
support, though many have chosen not to publicize that fact. One of the
few exceptions is Motorola Inc., which announced it will outsource half of
its chip production in the next few years.
"We expect massive changes throughout the industry" as the foundry
model catches on, said Magnus Ryde, head of TSMC's U.S. unit. "We
see the next five to 10 years giving us some interesting business
opportunities."
What's more, both of these Taiwanese foundries, which are now operating
at or close to capacity, expect a shortage in foundry capacity to develop
later this year, one that could extend for a year or more. Even now, "if a
customer wants to place a new order with us, we can't start it for at least
six to eight weeks in the future," said Jim Ballingall, vice president of
world-wide marketing for the UMC group.
New Setback in Memory-Chip Market
By contrast, most of the world's memory-chip makers, which by and large
are still dependent on profits from those commodity chips, are still suffering
from sagging prices. The latest trouble comes from South Korean chip
makers who sat out most of 1998 as a result of the Asian financial crisis,
but have since secured additional financing and are again pushing up
production to generate precious foreign exchange. As one big
consequence, the mainstay 64 megabit memory chip now goes for $5.50,
down from $9.50 in March.
Some analysts think that the memory market could start to stabilize by
year's end. Sherry Garber of Semico Research Corp., based in
Scottsdale, Ariz., expects a significant shortage for certain types of
memory chip, helping to push prices up.
Even if that doesn't happen, industry executives like Applied's Mr. Morgan
predict that big memory-chip makers will boost spending to be in a strong
position when supplies tighten next year. "They know if they don't pay,
they don't play,'' Mr. Morgan said. |
