Semiconductor Alert! (Jan. 21-25)

After I giving my column a final read on Friday noon, I was surprised to get a more positive feeling for the first time in more than a year. Am I imagining things, or is something finally happening?

DRAM prices are still going up
but Infineon doesn't know why

The DRAM business is still very sick. That view comes from one of the market leaders.

While DRAM prices have climbed steadily--in some cases more than tripling--since their low point in November, production costs are still running above average selling prices, and excess inventories still need to be worked off before the market can recover this year, declares Infineon Technologies CEO Ulrich Schumacher.

Prices for 128-megabit DRAMs prices have risen from less than $1 in November to more than $3, he notes. But Infineon's manufacturing costs are "a little more than $3" for that memory, he says. A new 0.14-micron process, however, promises to cut those costs by 30%, he says.

Infineon has increased its bit-volume output by 10%, but opted to hold back the ramp up of some DRAM manufacturing lines while it works off inventories. However, the market has been different this January. "Normally after Christmas, the traditional DRAM market becomes weaker and you see pricing pressure--however this time it has not happened," Schumacher says. And, he adds, Infineon doesn't know why DRAM prices have risen in January.

"In the first half of the year, we expect an increase in memory bit demand associated with the normalization of inventories," he says, "but any further recovery in memory product prices will depend upon a further consolidation in the memory market as well as the strengthening of demand in the PC and infrastructure systems markets."

(See Jan. 22 story.)

Infineon: the worst is over,
but outlook is still unclear

Chalk up another vote for this forecast: the worst is over in the 2001 chip downturn but the outlook is still unclear for the next six months.

That fearless forecast comes from Infineon Technologies, which this week reported a 5% sequential drop in revenues to $906 million in its fiscal first quarter ended Dec. 31 and a 30% fall from the year-ago quarter. It did manage to trim its net loss compared to the previous quarter, losing $291 million in the quarter vs. $460 million in the Sept. 30th quarter.

But the German chip maker is now seeing the first positive signs of improvements in memory. And it has not cut back its capital spending plans for its fiscal 2002 year, which was set at about $790 million back in November. Some spending had been delayed and pushed back from the first fiscal quarter, however.

The company cautions that the market outlook for the next six months "still remains uncertain" due to economic weakness in Europe and the U.S., but it is seeing signs of increased demand in some chip segments. It still isn't clear whether or not these improvements will lead to sustainable market recovery in 2002, Infineon says.

Infineon's Wireless Solutions Group posted a 15% sequential increase in revenues to $181 million in the fiscal first quarter, getting a boost from a moderate increase in demand for mobile handsets as well as increasing volumes for Bluetooth chip sets.

Its Wireline Communications Group reported a 41% sequential decline to $73 million in the just-ended quarter and on a year-to-year basis, these sales were down 60%. They were driven down by a strong deterioration of demand in the traditional telecom infrastructure business--such as analog line cards and ISDN ports--as well as continued weakness in fiber optics.

Infineon's Security & Chip Card ICs Group had revenues of $72 million, a drop of 18% from the previous quarter and 47% from the year-ago quarter. The decline was caused by lower sales of security controllers used in smart cards for mobile phones and inventory reductions at customers.

The Automotive & Industrial Group reported a 3% sequential drop in revenues to $241 million, but were up 4% from the year-ago quarter.

(See Jan. 21 story.)

Foundry business could be
snapping back in sharp 'V'

The world's largest silicon foundry provided more evidence this week that a real recovery is underway in this market. The third-party business seems to be taking a sharp "V," after the worst downturn in history.

Taiwan Semiconductor Manufacturing reported a greater-than-expected sequential increase of 23% in sales to $947 million in the fourth quarter from $769 million in the previous three months. Its sales had grown only 2% sequentially in the third quarter.

TSMC sold 558,000 eight-inch equivalent wafers in the fourth quarter, a 25% increase over third-quarter shipments, but still 44% behind the year-ago total.

Profits also turned up sharply. TSMC net hit $129 million, up from $34 million in the previous quarter.

Its fab-utilization rate jumped to 50%, up 41% in the third quarter--a level that now looks to be the lowest point in the downturn for TSMC.

Better yet, the first quarter looks like more of the same. TSMC expects sales to increase sequentially in the "single-digit" percentage range from the fourth quarter. Its fab-utilization rate is predicted to climb to about 60% in the first quarter, with leading-edge 0.18-micron and below processes expected to be running at utilization rates of about 90%.

Capital expenditures this year will drop 25% from 2001, however. The foundry giant will spend about $1.65 billion this year. By the end of 2002, TSMC plans to enough capacity in place to produce 358,000 eight-inch equivalent wafers per month, down 6% from where its total capacity was at the end of 2001.

(See Jan.25 story.)

Chip equipment makers
are taking tiny steps back

The chip production equipment market is taking tiny steps these days, but at least they're in the right direction. U.S. chip gear producers are still a long way from any sustained upturn, but their book-to-bill ratio again showed a slight improvement over the previous month. For December, the book-to-bill ratio edged up to 0.78 from 0.73 in November.

Remember, a book-to-bill of 0.78 means that $78 worth of new orders were received for every $100 of product shipped that month. A ratio of more than 1.0 indicates that business is improving.

Order bookings for December hit $652 million, about 7% above November's revised figure of $609 million, according the SEMI trade association. But business was nothing like it was a year ago, when December orders hit $2.37 billion.

Global shipments in December were $835 million, SEMI says, flat with November's $830 million. But compared with December a year, sales were off 65% from $2.39 billion posted in December 2000.

As usual, SEMI was cautiously optimistic. "There are some indications that capacity utilization and unit volume output have improved from the 2001 lows, in particular for some segments of the assembly and test markets," comments CEO Stanley Myers. But manufacturers are still uncertain about the near-term outlook, he adds.

(See Jan.22 story.)

Flat sales and falling orders
at Motorola Semiconductor . . .

The bad news keeps pouring out of Motorola Semiconductor. Chip sales in the fourth quarter were flat at $1.1 billion from the previous quarter, but down 41% from the year-ago three months. Order bookings fell 9% from $1.1 billion to $1 billion in the previous quarter.

The semiconductor unit posted an operating loss of $335 million for the quarter, a little improvement from the $355 million it lost in the previous three months. But these losses don't include any charges for the major restructuring going on in the division. The operating losses compared to an operating profit of $171 million in the fourth quarter of 2000.

(See Jan. 22 story.)

. . . as chip unit slashes
capital spending by 67%

Here's an example of just how bad things are at Motorola Semiconductor. It is slashing semiconductor capital spending to just $200 million in 2002. That's down 67% from the $610 million it spent last year, which was off 75% from the $2.4 billion spent in 2000. That's sure a funny way to run a growth business.

This unparalleled decline was described as part of Motorola Semi's new "asset light" chip strategy. By making such Draconian cuts in spending, the division hopes to reach a "moderate operating profit" in the fourth quarter this year.

To do this, Motorola is counting on the chip industry growing by 5-to-10% in 2002. "We expect the chip industry to show sequential improvement each quarter, with stronger acceleration in the second half," says Fred Shlapak, president of Motorola Semiconductor. "This should lead to considerable higher industry sales in 2003."

Motorola is earmarking its $200 million capital spending for the production of specialty technologies such as its silicon-germanium carbon processes and radio-frequency BiCMOS.

The division will be using more capacity at outside silicon foundries, but Shlapak says that "asset light does not mean R&D light." Motorola will maintain a "substantial investment" in new platform products and process development, he says. For example, Motorola plans to complete the qualification of a new 0.1-micron (100-nm) CMOS technology in its wafer fabs by this December.

(See Jan. 23 story.)

Intel figures Philippines is
good place to have a plant

Intel assembles and tests Pentium 4 microprocessors in Cavite, and apparently has had as good an experience in the Philippines as I did back in the Korean War. It does make a lot of sense. The Filipinos have several things going for them: They are better educated than the workers in most other lesser developed countries, they read and speak English, and their country is one of America's oldest, most consistent friends.

Intel, recognizing these were good reasons for it to locate a plant there, set up a assembly plant in Manila in the 1970s and the Cavite factory in the mid-1990s. This week Intel voted again for the Philippines when it revealed it was investing up to $100 million this year to upgrade and consolidate its IC-assembly and test facilities in the Philippines. It will consolidate its test and assembly operations here in Cavite, closing the Manila plant.

About 4,500 people now work at the Cavite plant, while 1,500-to-2,000 work in the Manila facility. While Cavite is near Manila, the move could affect many of the jobs in the capital, according to local reports.

(See Jan. 22 story.)

Here comes Taiwan's
third 300-mm DRAM fab

The Taiwanese continue to feel better about the DRAM market. In March, a third memory chip maker on the island will start building a 300-mm wafer fab. Nanya Technology is following ProMOS Technologies and Powerchip Semiconductor, both of which already are accelerating the start up of their next-generation plants.

Nanya hopes to begin equipping the $2 billion plant at the end of this year, with volume production slated to begin in 2003 using 0.11-micron processing technology. This will be the company's third fab--two 8-inch plants already are operating.

Nanya shelved the project last year to save money, as the chip industry was collapsing into its worst year ever. Memory prices plunged more than 90% last year. But DRAM makers here are growing more optimistic because of increasing DRAM prices since November and the growing possibility of more consolidation in the memory business. Nanya will fund its giant new fab by issuing global depository receipts, most likely late in the second quarter.

The other two companies are moving faster now with their 300-mm plants. ProMOS, an affiliate of Infineon Technologies, plans to be cranking out 5,000 300-mm wafers a month by this spring and more than 9,000 a month by year end.

Powerchip also expects to be turning out 12-inch wafers this year. It just stepped up its schedule and will start moving in production equipment two months earlier--in March--and will start pilot production in July. By December, it expects to be producing 15,000 wafers per month.

(See Jan. 22 story.)

Applied claims new turnkey
service can save big money

Applied Materials is trying hard to dramatically expand its marketplace. Beta test sites have now demonstrated that a new program, called Ramp Performance Management, can help significantly reduce the system installation time and speed up the start-up schedule, the production equipment giant claims.

Applied is combining its expertise in wafer fab tool installation and the experience of construction firms to offer what it calls the chip industry's first turnkey service program for accelerated ramps of new process equipment and plants.

"We see an additional opportunity to help customers streamline and accelerate the system hookup phase of fab construction, which traditionally has been a complex overlap of fab management, construction, architectural and engineering firms, and equipment suppliers," says VP David Fried.

RPM can integrate system start-up activities so that took hookup times can be "substantially reduced," he says. "By performing all aspects of the tool startup process, including integration of planning, design, material procurement, construction and tool qualification, we believe we can achieve significant time and cost savings for our customers."

(See Jan. 22 story.)

AMI Semiconductor (who?)
starts making noise again

You may have forgotten, but there is a chip maker based in Pocatello, Idaho. In 1988, AMI Semiconductor, then called American Microsystems, was acquired by Japan Energy and virtually disappeared for more than a decade.

But in 2000, a pair of U.S. investment firms--Francisco Partners and Citicorp Venture Capital--acquired 80% of the company and things began to change. Last year AMI recruited Christine King, IBM Micro VP, as its new CEO.

Now the company is launching the first in a series of 0.18-micron, hybrid gate-arrays. The XPressArray ASIC line is designed to replace field-programmable gate arrays from Altera and Xilinx. To build the new line, AMI has signed a foundry deal with Taiwan Semiconductor Manufacturing.

A novel two-step, hybrid-manufacturing approach is being taken to fabricate the chip line. First, the "front-end" or critical-layers of the new ASICs will be produced at TSMC. Then AMI will fabricate the "back-end," or interconnect portion of the chips on its 8-inch, 0.35-micron fab in Pocatello. This two-step approach is aimed at reducing--by up to 70%--the product cycle times and non-recurring engineering (NRE) costs associated with ASICs and FPGAs, says VP Vince Hopkin.

AMI is taking a niche strategy, focusing on low- and mid-density ASIC devices with about 5 million gates or less, Hopkin says. "We don't want to compete at the high-end against Texas Instruments, IBM, or any of those guys. They are focused on system-on-a-chip products with 20 million gates," he notes.

The new XPressArray line are designed to be drop-in replacements for several 1.8-volt FPGA lines in the marketplace, including Xilinx' Virtex-E devices and Altera's APEX-E chips. "FPGAs are expensive when you begin to ship them in volumes," Hopkin points out. While Altera and Xilinx say ASICs are more expensive than FPGAs, FPGAs are up to three times more expensive than ASICs, Hopkin claims.

(See Jan. 21 story.)

Micron gets leading-edge fab
for 1/4 the cost of new plant

So why would Micron Technology buy another fab now when so much over-capacity exists in the DRAM industry? Well, that's why they're paying the big bucks to the Idaho company's top management. Micron is paying Toshiba only about $300 million in cash and stock to acquire the Japanese company's Virginia DRAM wafer fab--far less than it would cost the U.S. company to build such a fab. What Micron paid amounts to only a quarter of the $1-to-1.2 billion that it would take to build the same leading- edge 0.17-micron plant from scratch.

The purchase price for Toshiba's Dominion Semiconductor is expected to amount to $250 million in cash and 1.5 million shares of Micron common, now worth about $48 million. The deal is expected to close in the first half of 2002.

(See Jan. 19 story.)

Fairchild sees no recovery
in pricing for most of 2002

While its chip markets are looking about the same to Fairchild Semiconductor as they did late last year--a third-quarter market bottom--the Maine chip maker seems to be going a bit more negative on prices.

This week the Maine vendor reported fourth-quarter revenues that were sequentially flat, with sales hitting $324.6 million vs. $325.4 million in the third quarter. Excluding foundry revenues, Fairchild's "trade sales" grew 3% to $313.2 million in the fourth quarter. Including charges for restructuring, acquisition-related costs, and other items, Fairchild showed a net loss of $16.2 million for the quarter.

"We continue to believe that we saw the low point for our trade sales in the third quarter and that we are moving through the early stages of a market recovery," says CEO Kirk Pond. "During the quarter, our trade bookings improved 8% sequentially, and our trade book-to-bill ratio was greater than 1:1."

For this year, "our visibility improved slightly, but remains low," Pond says. "Our 13-week backlog remained flat through the quarter."

"Pricing seems to be bottoming for most of our product lines, even though our market environment remains very competitive," Pond says. "Because of the industry-wide drop in unit demand during 2001, we anticipate no real recovery in pricing for much of 2002." That's not good.

(See Jan. 22 story.)

Taiwanese chip companies
can't resist lure of China fabs

While the Taiwan government once again postponed a decision on whether to allow local semiconductor companies to set up wafer fabs in Mainland China, it is now seems only a matter of time before this major shift begins.

Lured by China's fast growing chip market, Taiwanese giants such as Taiwan Semiconductor Manufacturing, United Microelectronics, and Advanced Semiconductor Engineering, are rushing now to complete their plans to move into China before the business cycle picks up again.

The government doesn't have a firm timetable for making its decision, but the foundries say they will wait until there is a clear policy regarding such investments.

Once the ban is lifted, the Taiwan foundries are expected to equip Chinese fabs with 0.25-micron process equipment. For the most part, chip makers in China are now using trailing-edge 0.35-micron and 0.5-micron technologies.

TSMC chairman Morris Chang is now in China looking at sites and UMC reportedly plans to spend $5 billion to build factories there beginning as early as mid-2003. "What the companies are doing is to put everything in place, so that as soon as the ban is lifted, they can catch demand of the Chinese market very quickly," says Connor Liu, analyst at SG Securities in Taipei.

But time's a wasting and both companies are finding it increasingly difficult to wait for the government to lift the ban on investments in 200-mm or larger wafer fabs. "Morris Chang has said that the it's getting pretty urgent to set up fabs on the mainland," notes Rick Hsu, analyst for Nomura Securities in Taipei. "The sooner they do that, the better they will have influence in China, which many people believe will grow faster than any other country over the next 10 years."

The Taiwan government has delayed the approval twice mainly because it doesn't want China to gain IC technologies that Taiwan has, Chang has said previously. "Investing in China is a trend that can't be resisted," he said. "To meet our customers' requirements, TSMC has no choice but to build capacity there."

(See Jan.22 story.)

How long can chip gear
vendors wait for upturn?

After the depression-like results of the fourth quarter for production equipment makers, one has to wonder if the chip gear industry can wait until 2003 for the next upturn. Look at Novellus Systems, which this week reported a 34.1% sequential decline in net sales--from $304 million in the third quarter all the way down to $200 million in the fourth. Compare with year-ago results, Novellus was down a whopping 55%.

The deposition tools vendor had an even bigger drop in order backlog. At the end of the ear, it totaled $267 million, of 59% from the year-ago figure of $644 million.

But thanks to a pre-tax $25.4 million reversal of bonus and profit sharing expenses recorded in the first nine months, the San Jose company was able to post a net income of $17.2 million.

(See Jan.22 story.)

Agere Systems forced into
another round of downsizing

Last year's major cutbacks weren't enough to solve Agere Systems' deepening problems. The chip maker has launched another round of downsizing in an attempt to balance its business. It is now negotiating to sell its Orlando, Fla., wafer fab and is eliminating 1,400 jobs in a major streamlining of its operations.

The massive changes should enable the chip maker to reach break-even at a quarterly run rate of $700 million, the company figures.

IC and optoelectronics operations in Reading and Breinigsville, Pa., will be moved to its Allentown, Pa., campus. The firm also will move 350 corporate support and product development people, or half its New Jersey workforce, to Allentown. Its remaining R&D operations will be moved to a new site in central New Jersey.

CEO John Dickson was frank about what he was trying to do. "We are streamlining our business to create an operating model that will best support Agere's future profitable growth," he says. Consolidating most of its IC and optoelectronics manufacturing and product development in Allentown "will allow us to optimize design and manufacturing synergies and more rapidly introduce integrated solutions to the market," he says.

The latest round of cutbacks were disclosed this week as the company disclosed a dreadful fiscal first quarter ended Dec. 31st. It reported a net loss of $375 million, which included the restructuring charges. Sales fell 10.5% from the previous quarter--from $600 million to $537 million.

In last year's downsizing, Agere closed and sold a wafer fab in Madrid, Spain, and laid off 4,000 workers worldwide.

(See Jan. 23 story.)

Cypress net up sequentially,
T.J. hopes upturn has begun

For Cypress Semiconductor, business is slowly, but surely beginning to improve. "Our bookings started to recover six months ago, our revenue last quarter. Despite very limited visibility, the market upturn continues," comments CEO T.J. Rodgers.

The San Jose chip maker reported a 6% sequential increase in revenues to $191.1 million in the fourth quarter from $180.3 million in the previous three months. But compared to the year-ago quarter, sales were off by 48%.

No surprise on net, which hit a loss of 11 cents a share, matching analyst estimates. Including charges for restructuring, acquisitions, and other non-recurring items, the company showed a net loss of $37.7 million for the quarter. The Cypress break-even sales target is now about $225 million per quarter.

"This is our first sequential quarterly improvement after three quarters of declining revenue," says Rodgers. "We are hoping that this is the beginning of a sustainable recovery for the semiconductor industry. We made our numbers in the fourth quarter relying heavily on business booked in the quarter and that appears to be the case again this quarter."

(See Jan. 24 story.)

Blank wafer silicon market
consolidating; a new No. 2

Is market consolidation in the blank silicon wafer market a good thing for the chip industry? The vendors say yes, but I dunno. In any event, it's happening.

The combination of third-ranked silicon supplier Sumitomo Metal Industries and fourth-ranked Mitsubishi Materials will create the world's No. 2 supplier with nearly 25% of the blank silicon business. Japan's Shin-Etsu Handotai Co. will remain the largest silicon wafer supplier with a lead of several percentage points, according to industry estimates.

The new Tokyo company, called Sumco for Sumitomo Mitsubishi Silicon, will begin operations Febr. 1st. The merger came a couple of years after the two vendors formed a joint venture to develop and make 300-mm silicon wafers.

The merger is part of a consolidation now going on with blank wafer suppliers, which were hit hard by two severe chip downturns since the late '90s. The global blank silicon wafer market is estimated to run about $5.2 billion worldwide, still below the $6 billion racked up in 1997. This year these are expected to grow 9.5% to $5.7 billion, according to the SEMI trade group.

"This merger is a classic case of the sum being greater than the parts," brags Chet Brauch, CEO of Mitsubishi Silicon America, U.S.-based arm of Mitsubishi's silicon operations. "We can leverage our size and strength in all areas, from advancing the technology to anticipating our customers' global product needs," he maintains.

"Customers will have more choice and greater flexibility than they have ever experienced from any other wafer supplier," adds Kaz Nagano, president of Sumco USA. Spoken like a true salesman.

(See Jan. 25 story.)

We welcome your feedback, comments, criticisms, or questions. E-mail us at bhenkel@aol.com. And remember: God bless America!

(Click here for last week's Alert!.)