07/14/97 CHIPMAKERS FOR HIRE: THE NEXT BIG LEAP (int'l edition)

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CHIPMAKERS FOR HIRE: THE NEXT BIG LEAP (int'l edition)
TSMC and other Asian freelancers plan a host of new plants
There was a lot of scoffing a decade ago when Morris Chang persuaded the government of Taiwan to help him build the world's first silicon wafer plant devoted entirely to contract work for foreign semiconductor makers. Skeptics doubted that the investment would ever pay off. Instead, Chang's Taiwan Semiconductor Manufacturing Co. revolutionized an entire industry. Freed from the financial burden of having to build their own wafer fabs, dozens of highflying Silicon Valley chip houses were able to rush into fast-growing and lucrative markets because they could get their designs etched onto silicon at TSMC. With four wafer plants operating at full capacity, TSMC expects profits to hit $535 million this year on sales of $1.5 billion.
TSMC and other Asian foundries are ready for the next big leap. Over the coming decade, TSMC plans to spend $14 billion to build six additional wafer fabs at a new technology park in southern Taiwan. United Microelectronics Corp., a local rival that has shifted its focus from its brand-name chips to the foundry business, recently announced that it will pony up $18 billion. Singapore foundry Chartered Semiconductor Manufacturing, which recently formed partnerships with Hewlett-Packard Co. and Toshiba Corp., also plans a major expansion.
MULTIMEDIA GIZMOS. These companies are betting that demand for silicon wafers is ready to soar again. They see evidence that the market for memory chips in PCs is rebounding. The companies also anticipate that the growing wave of multimedia appliances will create opportunities for design houses, such as Altera, Trident Microsystems, and S3, to develop myriad new varieties of semiconductors with functions like 3-D graphics and communications. With the costs of new fabs expected to exceed $2 billion each, a growing number of chipmakers will likely rely on outside foundries to fabricate their products rather than build their own plants. ''We predict a lot of companies won't be able to make this kind of investment,'' says TSMC Vice-President Huang Yen-chun. ''So we will do it for them.''
The East Asian foundries also know that they must ante up big in order to remain in the game. Everyone from Lucent Technologies and Siemens to Toshiba and Samsung Electronics Co. is expanding furiously. And smaller semiconductor producers are starting to take equity stakes in newer fabs closer to home that they will share with other chipmakers. Some analysts predict a shakeout of semiconductor companies, especially if projections for future wafer demand fall short.
Still, some analysts agree that the big Taiwanese foundries will be difficult to compete with in contract manufacturing. Since they spread their costs for research and development and sales staff among up to a dozen plants, few will be able to match them in terms of price and flexibility. ''TSMC is clearly the big gorilla in this area,'' says S. Russel Craig, a partner in Andersen Consulting's electronics practice. ''And if UMC really goes ahead with what they've announced, they will be another very large gorilla.'' Churning out silicon wafers by the billions may not be the glamour end of the semiconductor industry. But as TSMC is proving, big profits will flow to those who have the nerve and money to crank up their operations.
By Jonathan Moore in Taiwan and Pete Engardio in New York