Science & Technology: SEMICONDUCTORS
THE GREAT SILICON RUSH OF '95
Calling it a spending binge hardly suffices. Try orgy. The semiconductor industry is throwing money at new, big-ticket chipmaking plants at record rates. In September alone, Fujitsu, Hitachi, Motorola, SGS-Thomson Microelectronics, and a partnership of Toshiba and IBM announced plans to build five chip plants at a cost of $6 billion. And Samsung Group will join the billion-buck crowd any day now.
All told, 90 new wafer-fabrication factories, or "fabs," will come on stream this year and next. These 90 plants will have cost more than $75 billion to build. That's more than the industry invested during all of the 1980s.
Chipmakers are following a prudent guideline: Those who plow the most into new production facilities win. That's how the Japanese edged out the U.S. in the 1980s--and how the U.S. came back in the 1990s. And it's how other chip suppliers in Asia, especially South Koreans, hope to grab market share. They're now outspending everyone else (chart).
MEMORY HOGS. The coming tide of new capacity may be one reason why investors are skittish about high tech. But the gurus don't see overcapacity problems for several more years. Daniel L. Klesken, a veteran chip-industry analyst at Robertson, Stephens & Co., has hiked his long-range forecast four times over the past 12 months. He now pegs chip sales in 2000 at $350 billion, up 175% from his prediction of a year ago.
One reason: Intel Corp.'s latest microprocessors and Microsoft Corp.'s new Windows 95 operating system are memory hogs. New PCs need two to four times as much dynamic random-access memory (DRAM) as older PCs. "We didn't think Win95 would have much effect on DRAM demand," admits Jerry D. Hutcheson, chairman of market-watcher VLSI Research Inc. in San Jose. He knows better now.
No matter where you turn, the story is the same: "We don't see any abatement in this insatiable appetite at least through 1997," says John Luke, president of TSMC USA Inc., the U.S. arm of Taiwan Semiconductor Manufacturing Co. TSMC broke ground last April for a $1 billion fab in Taiwan and already plans another, its fifth, because demand exceeds supply by at least 20%. Concedes Kevin J. McGarity, senior vice-president and head of worldwide marketing at Texas Instruments Inc.: "We are basically out of capacity."
U.S. chipmakers showed early this decade that investments in new capacity can produce rapid market-share gains. Now, Korean electronics giants, such as Samsung Semiconductors Inc., are following suit, says George Burns, head of Strategic Marketing Associates in Soquel, Calif. Once Samsung decided to take the lead in DRAMs, he says, "it was a pretty straightforward proposition to figure out how much they had to spend to get there."
NEW CONFEDERACY. The company increased its capital budget steadily over the last 10 years, and in 1994 climbed to the No.1 spot, eclipsing such DRAM heavyweights as NEC Corp. and Toshiba Corp. Dataquest Inc. figures that Samsung is investing nearly $2 billion in new capacity this year. Only three chipmakers are spending more: Intel, at $3.5 billion; Motorola Inc., at $2.3 billion; and Korea's LG Group (formerly Goldstar), which is making its own bid for a bigger slice of the action, with an ante of $2.1 billion.
But Samsung seems ready to raise its bet again. Instead of breaking ground for one new wafer fab each year, says Mark Ellsberry, marketing vice-president for Samsung Semiconductors in San Jose, the company is "highly likely" to start a new chip factory every six months. The next one will be a $1.3 billion fab in the U.S.
The U.S. is clearly the hotbed for gigabuck chip plants. While a few such behemoths are under construction or planned in Asia and Europe, at least a dozen are in the works in the U.S., including three by Intel and two by Motorola, not counting the Austin factory that Motorola just opened. One of these new plants is destined for an unusual chipmaking location: Virginia. It will crank out PowerPC microprocessors in Richmond, just down the road from the $1.2 billion plant that IBM and Toshiba will build in Manassas.
All the spending by U.S. chip producers is helping the American companies that supply the exotic equipment used to make chips. VLSI Research figures U.S. suppliers have 51% of that $24 billion market, vs. 42% for Japanese rivals. By 2000, when the equipment business could top $45 billion, VLSI predicts U.S. suppliers will have 55%. The chip-equipment industry is also on a spending spree--developing the next generation of chip systems while cranking out all the equipment needed by the new wafer fabs. Japan's Nikon Corp. is expanding its chip-equipment business by $3 billion, and Applied Materials Inc. in Santa Clara, Calif., says it will pump as much as $500 million into new technology by 1999.
CAPITAL CRUNCH? Around that time, some chipmakers may find themselves running into a capital crunch. The projected cost of a chip plant at the start of the new century is $3 billion--and still climbing. "There is concern about the increasing cost of wafer-fabrication plants," says Steven R. Appleton, president of Micron Technology Inc. In fact, some industry leaders--including Intel Chairman Gordon E. Moore--worry that the ante required in the next decade could soar beyond the reach of all but a handful of companies.
For now, chipmakers are basking in the longest boom in the industry's history. The chip business used to gyrate every few years, with prices sometimes plummeting 50% in six months. The consensus is that those roller-coaster days are gone forever, thanks in part to close working relationships between chipmakers and their customers. Furthermore, when the current PC boom in the U.S. and Europe slows down, there's a whole world of developing nations that will need PCs, cellular telephones, and all sorts of electronics hardware. Which means that money invested now won't go to waste.By Otis Port in New York and Michael J. Parks in Seattle