Semiconductor Alert! (Mar. 26-30)

Chip equipment sales
are soaring in China

The current downturn seems to be emphasizing the booming expansion going on in the chip business in China. The semiconductor production equipment business may be down throughout the world, but apparently not in the PRC.

Semiconductor capital spending in mainland China will nearly double to $4 billion in 2001 from about $2.1 billion last year, according to the latest government estimates. This investment total should surge to $7 billion by 2003, the Chinese predict. Over the next five years, five-to-six new 8-inch fabs and up to two 12-inch fabs will be added, government officials say.

Applied Materials, which considers China and Taiwan one regional market A politically correct position in the PRC, predicts that it will become the world's second largest chip market by 2010. Semiconductor revenues in the region will forge ahead at a 28% annual growth rate to $25 billion by 2004, predicts David N.K. Wang, Applied vice president. Major tool suppliers are going all out to expand their business in China. Applied's sales in China are expected to jump from about $100 million in 2000 to $1 billion by 2005, Wang predicts. ASM Lithography is also sharing in this boom. It not only is selling its latest deep-ultraviolet scanner to the new Motorola fab in Tainjin, but also a lot of older systems, says sales manager Rodney Chisholm.

Applied's Wang estimates the China-Taiwan region will account for 8.5% of the global market in 2004 and could reach 33% by 2010. And the current boom may be only the beginning. Wang agrees with Chinese officials that chip production in China now meets only 20% of domestic demand. Even with the massive investments being made in new wafer fabs, domestic output will still meet only 25% of the chip demand in China in 2005.

(See March 28 story.)

Another China IC advantage?
it may be low-cost producer

Another built-in advantage for China in chip making, as far as some vendors are concerned, is that the big country is now the low cost producer. The giant nation has significant cost advantages over Taiwan, for example, in building and operating wafer fabs, says one manager who has worked in both countries.

"Construction costs in Shanghai are 35% less expensive overall than those in Taiwan," declares Richard Chang, president of Semiconductor Manufacturing International (SMIC). "The water supply is 60% less expensive ... and bulk gas costs are 30% lower than Taiwan."

Chang, who formerly ran Taiwan's World Wide Semiconductor Manufacturing, maintains that power in China is "far more reliable" than it is in Taiwan. He notes that his Taiwan fab suffered "frequent blackouts" from the over-stressed power grid of that country.

But Chang has no intention of "starting a price war" with foundries in Taiwan. "We can sell enough to customers in China to fully utilize SMIC. We don't have to break into the market by cutting price," he adds, since chip demand in China far outweighs local IC production. SMIC will start pilot production in late November and go into full production early next year at its new fab in Shanghai's Pudong industrial area.

(See March 28 story.)

China also expanding
its IC infrastructure

China is not only building a bunch of modern, new fabs, it also is getting an industry infrastructure.

China's Grinm Semiconductor Materials Co. has started turning out its first 6- and 8-inch diameter blank silicon wafers at a new Beijing factory. The substrates are not only for the rapidly expanding local chip industry but also to sell in Japan, Europe, and the U.S.

Grinm--one of China's three major silicon materials producers--has the capacity of producing 100,000 six-inch wafers per month at its new plant, says Lisa Wang Lidu, sales engineer for the state-run company. It also is in the testing stage for turning out 8-inch diameter wafers. The firm is no newcomer to the blank wafer business. It has been selling 3-, 4-, and 5-inch production wafers for nearly a decade; half of its output goes to China fabs while the other half is exported.

(See March 29 story.)

Japanese earthquake
damages fabs after all

The 6.4-magnitude quake that hit Japan just south of Hiroshima this past week caused greater damage to a couple of wafer fabs there than was initially reported. Mitsubishi Electric teams were still "working furiously" on Friday to restore production at the company's Saijo fab on Shikoku island. The company, which had claimed earlier the 8-inch wafer facility would be back on-line within a couple of days, now says it would not resume operation until mid-April.

In Hiroshima, NEC's 128-megabit DRAM facility was running at "just over 50% capacity" on Friday, but the company promised to resume full production by April 5. The fab, which also produces 288-megabit Rambus DRAMs, has a production capacity of 35,000 8-inch wafers per month. Other NEC fabs have boosted production to meet the shortfall in DRAM production and the company claims it will have no problem meeting its April production quota.

It wasn't clear whether the shutdowns would have any effect on the memory market. "The DRAM market is soft enough that taking one fab -- even a big one -- offline for a few weeks will probably be a good thing," declares Cahners In-Stat analyst Steve Cullen. But Sherry Garber, analyst at Semico Research, says the temporary closures "may change the perception," if not the reality, of DRAM availability.

(See March 30 story.)

Motorola Semi is about
to start Tianjin fab--finally

Motorola has been planning its new Tianjin, China, fab since the early 1990s, but it wasn't able to start building the plant until last year. Next week, the chip maker finally will begin processing wafers at the MOS17 fab, according to industry sources.

At Semicon China, which is being held in Beijing this week, Motorola wouldn't give the exact startup time, but Ross Dewhurst, a manager at the Tianjin fab, did say that production "will begin sometime in the next couple of months."

The 200-mm wafer fab is part of a planned $1.9 billion manufacturing complex that will include the wafer fab and a systems assembly plant for wireless telecommunication products.

To support the plan calling for the production ramp to begin later this year, initial engineering wafers are expected to be processed starting next week. The 8-inch fab is being equipped for 0.35- and--eventually--0.25-micron process technologies. The plant will fabricate ICs for cellular phones and other high-volume products in China.

(See March 28 story.)

New Chinese foundry
speeds up fab launch

Most of the world's chip makers may now be delaying or canceling plans to add new capacity, but that doesn't seem to be happening in China, the industry's hottest market. Semiconductor Manufacturing International (SMIC) is accelerating its production schedule by two months in an effort to speed up the company's entry into the silicon foundry business.

The Shanghai-based foundry startup originally planned to begin pilot production in its new 8-inch wafer fab in November. "We are two months ahead of schedule, so we can start pilot production as early as September," says CEO Richard Chang.

SMIC intends to accelerate its overall production schedule. "We will ramp up quickly," he says. Initially, the new foundry will process 2,000-to-3,000 wafers per month. SMIC is getting its sub-micron production process from Japan's Toshiba.

The 8-inch fab represents only the first phase of the chip maker's launch, it also plans to build two more 8-inch plants, officials report. And they may even put in a 12-inch wafer pilot line in a second fab facility.

(See March 28 story.)

KLA-Tencor tool saves
3 months of R&D time

KLA-Tencor seems to have a winner in its new ultraviolet wafer inspection tool. South Korea's Samsung Electronics has used the new device to cut development time of new DRAM process technologies by several months.

The San Jose company says its UV imaging wafer inspection system combines UV illumination with broadband optics to significantly reduce noise that comes from color variation across the wafer's surface. At the same time, it provides high throughput in production inspection applications.

"We have booked more than $125 million in orders for the 2350 UV since its introduction last July, and it is currently running in advanced development and production lines worldwide," points out EVP Rick Wallace.

Samsung appears to be delighted with the new inspection tool and plans to work with KLA-Tencor to use it to develop the next-generation DRAM technology. "KLA-Tencor's tool has helped us to save at least three months in our last technology development cycle," says Moon-Yong Lee, who heads Samsung's chip R&D.

The UV inspection system is capable of detecting defect below 100 nanometers (0.10 micron), including single missing vias, container and poly bridges, wet residues, and metal stringers, KLA-Tencor claims. And its processing speed is claimed to be twice as fast as the company's previous generation of imaging inspection platforms.

(See March 28 story.)

Japan tries to regain lead
in packaging technologies

The Japanese have put out a call to arms to the nation's companies, universities, and government that is aimed at reinvigorating the nation's flagging leadership in miniaturization and fine packaging technologies.

JEITA, the nation's electronics trade group, has written a new road map called the Jisso Technology Roadmap 2001 that sets out the needed packaging technologies for products expected to emerge in 2005-to-2010.

The Japanese are worried. Hisao Kasuga, chairman of the Jisso Roadmap Council, warns that Japanese jisso technology is falling behind that of countries in which research is coordinated at the state level. "If we don't change the situation, we will lose our advantageous position in jisso technology," says Kasuga, who is strategic planning manager for NEC's packaging and testing engineering.

For the 2001 edition, the council chose to focus on product areas in which the Japanese electronics industry already has market strength. The roadmap council concentrated on products where Japan already has market strength: wristwatch-type, wearable products; portable audio; mobile phones; digital still cameras; digital video cameras; palm-size DVD products; car navigation systems; notebook PCs, and digital TVs. In the next year, the roadmap council intends to pinpoint the highest-priority challenges in the road map and launch working groups to address those problems.

"Universities are also researching jisso technologies, but the efforts are not yet well-linked. We have to integrate these activities," Kasuga says.

(See March 29 story.)

Another expert says Intel
will cut capital spending

Another key industry observer has joined the small, but growing group of experts that doesn't believe Intel management when it insists the microprocessor giant has no plans to lower its $7.5 billion capital spending budget this year. Morningstar analyst Jeremy Lopez now says the "question isn't whether or not Intel will cut its spending, but rather by how much."

Based on current capital spending budgets, Morningstar expects the top 20 chip makers to reduce their 2001 budgets by at least 15%. Chicago-based Morningstar says these company are responsible for 70-to-80% of chip-equipment equipment spending worldwide.

"This outlook may be dim, but it may get even worse," Lopez says. "The chip industry's biggest rollers, Intel and Samsung, likely will reduce their spending forecasts going forward. With their current capital-expenditure numbers buttressing an already poor forecast, we find it very unlikely these giants will bail out the chip-equipment industry."

Lopez is also predicting an end to the recent rise in semiconductor equipment stocks because of new cuts in plant investments. He noted the tech-heavy Nasdaq list has fallen 25% in the past three months but shares of the chip-equipment makers have gone up 6%.

(See March 29 story.)

Intersil dumping
legacy auto business

I guess there's no room for nostalgia when a market is going to pot. Intersil is closing its semiconductor plant in Findlay, Ohio, which has for decades turned out ICs for automotive and industrial products. Some 430 people work at the facility.

"Our plan to exit our legacy automotive business has been accelerated due to weakening economic conditions and decreased demand for these products over recent months, explains CEO Greg Williams. "This action, although difficult, will allow us to focus resources on higher growth opportunities," he says, such as analog chips for the wireless and communication markets.

Intersil will begin a "phased plant closure process," which is expected to be completed within the next 12-to-18 months.

(See March 29 story.)

NEC joint venture breaks
ground for new China fab

Also moving full-speed ahead to add new chip capacity in China is Shougang NEC Electronics. It is getting ready to break ground on its first 8-inch wafer fab that will cost more than $1 billion.

Beijing-based Shougang NEC will break ground for its new fab in May. Once tools are installed for 0.35-micron processes, the plant will be ramped into production during the third quarter of 2002, according to industry sources.

The Beijing facility will process integrated circuits for both NEC and other silicon foundry customers, said Yamai Masaharu, general manager of Shougang NEC. The company is a joint chip-manufacturing venture between NEC and Beijing-based steel giant Shougang Group.

The new plant represents a major upgrade for the Chinese chip maker, which is a joint venture between NEC and Shougang, a Beijing-based steel giant. It has been fabbing chips on 6-inch diameter wafers using 0.35-micron process technology since the mid 1990s. It reportedly plans in the near future to boost the fab's volume from 13,500 to 20,000 wafers per month.

NEC is also involved in an ambitious, 8-inch wafer-processing venture in Shanghai. Shanghai Hua Hong NEC Electronics has been in production for some time. Shougang also is involved in another 8-inch fab venture in China. Beijing Huaxia Semiconductor Manufacturing will concentrate on foundry services for analog and power ICs using a new wafer fab in Beijing starting next year.

(See March 27 story.)

Surprise--China's PC
market still grows fast

Believe it or not, there is at least one PC market that is still humming. While the global market for PCs continues to be soft, business in China is holding steady and is expected to grow from 25-to-29% this year.

That forecast comes from Tan Wee Theng, president of Intel China, who predicts that China's PC market will grow from 6-to-7 million units last year to 9-to-10 million systems in 2001. "We haven't seen a significant slowdown in the PC market in China," he says. "The consumption rate is still healthy. We have not reached a point of saturation."

In fact, the company's forecast of 9-to-10 million could prove to be conservative. "Some believe it will be in this ball park, while some believe we will ship more," Tan says.

China's PC market is changing fast. Until recently, it served as a dumping ground for lagging-edge computers. But now the nation is becoming a consumer of new systems technology and a home computer user base is emerging. "China now has the largest mix of high-end microprocessors in Asia," Tan says.

Local PC companies also are taking over the market. Until the mid-90s, multinationals such as AST, Compaq, Hewlett-Packard, and IBM dominated. Now the Legend Group of Beijing has surpassed foreign suppliers as the largest PC vendor in China with a 30% market share. "If you look at the top five PC makers in China, three are local," Tan notes. "If you look at the top 10, six or seven are local."

(See March 27 story.)

Cisco reportedly halts
component ordering

The chip inventory problem may be worse than some observers realize. Continuing weakness in the networking infrastructure market has forced networking giant Cisco Systems to halt component ordering, according to Eric Ross, analyst at Thomas Weisel Partners in San Francisco.

"We believe Cisco has stopped ordering components altogether from Altera and Xilinx, while orders from other key customers including Nortel, Lucent, and EMC are likely severely diminished as well," he says.

In a research note issued this week, Ross says that inventory levels throughout the supply chain have swelled to 12 months, while inventory at major Cisco suppliers Altera and Xilinx have risen to eight and seven months, respectively, in March. Altera and Xilinx each get roughly 75% of their sales from network-equipment OEMs.

(See March 27 story.)

Conexant Systems is making
massive cuts to get profitable

The downturn really seems to be hitting Conexant Systems harder than most chip makers. The Newport Beach, Calif., vendor is eliminating 20% of its workforce, including 1,500 full-time jobs, in an attempt to cut costs.

It also is temporarily shutting down two wafer fabs and a chip assembly plant for two weeks and may sell its digital imaging business, which includes CMOS image sensors and digital camera processors. Conexant also is looking for a way to exit the sub-assembly business and divest itself of a module plant in El Paso, Tex. And Conexant will make "significant reductions" in capital spending as well as cut the pay of senior management by 10%.

The Newport Beach company said these actions were necessary return itself to profitability in the midst of a severe slump in its communications chip markets. The company still plans to push ahead with the plan to split itself into two publicly-traded companies by the end of September.

Conexant now expects to report a 35-to-40% drop in revenue in its current fiscal quarter, which ends this week, as compared to $410.4 million in sales it did in the quarter ended Dec. 31, 2000. That kind of drop will result in the company reporting a quarterly loss of 35-to-40 cents per share, which does not include one-time charges related to layoffs, restructuring, and setting up additional inventory reserves.

The restructuring and layoffs will result in a charge of $50 million, with $7 million of those charges taken in the present quarter. It also will set up an additional inventory reserve of $125 million as the result of "steep reductions" in current demand and a lack of visibility into future demand. Most of these inventory reserves relate to Conexant's digital cellular, set-top box, and multi-service access product lines.

(See March 26 story.)

LSI Logic doesn't let slump
stop it from buying C-Cube

With stock prices in the toilet, I didn't think anyone these days would be pursuing major mergers. But Wilf Corrigan, longtime CEO of LSI Logic, once again surprised me. His Milpitas, Calif., chip maker, which has been redirecting itself in recent years, is trading $878 million in stock to acquire C-Cube Microsystems.

The idea is to strengthen LSI Logic's position in consumer electronics applications by adding C-Cube's video compression technologies--including MPEG pioneered by the company in the 90s--and expand LSI Logic's product offerings for communications, digital set-top boxes, and other entertainment applications.

C-Cube, which is also based in Milpitas, employs 600 workers. Last year, it posted a net loss of $7 million on sales of $265 million.

(See March 26 story.)

Market saturation, price war,
describe PC business this year

It's not looking good for the PC business. In fact, one of the bigger optimists--Dataquest--sees growth steadily decreasing over the next five years and another round of price wars in the U.S. this year.

The U.S. PC market is nearly saturated and Canada and Western Europe are not far behind. "Unless the industry is able to stimulate faster replacement cycles, shipment growth will undoubtedly slow in these markets," warns Dataquest analyst George Shiffler. "Given that these markets constitute 55% of the global PC market over the foreseeable future, that will put a significant damper on industry growth."

"We anticipate a price war . . . as direct vendors Dell and Gateway endeavor to gain market share from Compaq, Hewlett-Packard, and IBM," says Martin Reynolds, vice president for Gartner, Dataquest's parent. "The direct vendors will lower margins to do this, which will cause others to give serious thought about how they run their PC business."

Dataquest sees global PC sales this year of 144.5 million computers, a 10.7% increase from 130.5 million systems in 2000. Sales growth will drop every year for the next four, it predicts. In 2005, unit shipments will reach 212.9 million systems, an increase of just 7.9% from 197.2 million PCs shipped in 2004.

"The PC industry suffered a nasty surprise in fourth quarter 2000 on account of the dramatic turn in the U.S. economy," says Shiffler. "We're concerned that circumstances in the U. S. still appear to be deteriorating and that the U.S. slowdown looks to be spreading to the rest of the world."

(See March 26 story.)

If you have any comments or questions, don't hesitate to E-mail us at bhenkel@aol.com. Have a great weekend!

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