International -- Asian Business: Semiconductors
Fat City Again for Asian Chipmakers (int'l edition)
They're building and spending like mad. Is a bust in store?
A year ago, when Asia was mired in crisis, business was so slack that Taiwan Semiconductor Manufacturing Co. was having trouble keeping its plants running at two-thirds capacity. Now it's building new plants so fast that it's hard to keep up. Already, the world's biggest contract manufacturer of chips, the company is building a state-of-the-art silicon wafer plant in Taiwan's Hsinchu science park. Two more plants are going up in the southern city of Tainan. In Singapore, it is building a wafer fabrication plant with Philips, while yet another is ramping up in the U.S. All told, TSMC is spending $4.8 billion this year, just a shade less than industry titan Intel Corp. "We are in a silicon boom," says Marketing Vice-President Michael M. Pawlik.
So, too, are chipmakers across East Asia. After weathering some tough years, the survivors of an industry shakeout and a regional financial crisis are again on a capital spending spree. United Microelectronics Corp., Taiwan's No. 2 foundry, plans to spend $2.4 billion on new fabs this year. On Feb. 18, Singapore's state-controlled Chartered Semiconductor Manufacturing Ltd. broke ground on a $2.1 billion fab. And in South Korea, Samsung Electronics Co. is plowing billions into more capacity for memory chips.
Build fast, build more. The last time Asian chipmakers went on such a binge was in the mid-1990s. The results were tragic: huge overcapacity, a crash in exports, and the financial ruin of hard-charging new entrants. Are Asia's chip champions about to make the same mistake?
There's reason to believe history won't repeat itself. The steep downturn of 1996-98 weeded out weak players across the region or has forced them to sit on the sidelines. The current buildup is being led by outfits such as TSMC, Samsung, and UMC, which have emerged stronger out of the crisis.LOGICAL SWITCH. What's more, Asian producers in the 1990s went overboard in dynamic random-access memory (DRAM) devices and other commodity chips prone to rapid demand swings. Now, the overwhelming majority of spending is for the logic chips used in wireless phones, set-top boxes, and countless other digital appliances that are in hot demand as Internet use explodes. Foundries that make these specialty chips are now booked solid. Boris Petersik, regional semiconductor analyst for Donaldson, Lufkin & Jenrette Asia Ltd., figures that sales of Asian foundries specializing in logic chips will surge more than 60% this year.
Such growth prospects have not been lost on investors. Buoyed by a 60% boost in profits, to $800 million in 1999, TSMC's stock has soared by 185%. Rival UMC's stock nearly tripled as well. Even Singapore's Chartered Semiconductor, a perennial money-loser, saw its stock leap by 70% after posting a $22 million fourth-quarter profit on sales of $230 million.
The fat times haven't quite returned to makers of memory chips. After rebounding sharply because of tight demand in 1999, spot market prices for standard 64-megabit DRAMs have slumped from $21 in September to around $6, largely thanks to the post-Christmas drop-off in PC sales. But the cyclical decline hasn't been nearly the disaster it was for Korean chipmakers in 1996. Many midsize Taiwanese producers have now abandoned DRAMS and are turning their plants into specialty-chip foundries. And most Japanese rivals have either misjudged the market or been too financially strapped to invest in new capacity since 1997. Now, companies such as Fujitsu, Hitachi, and NEC are focusing on more profitable, customized logic chips, too. "The DRAM slump has ended, but people are loath to invest more," explains NEC Corp. spokesman Aston Bridgman. Memory now accounts for just 22% of NEC's chip sales.
This shakeout should ease the competitive pressure for the three major memory producers who have stayed in the game--Samsung, Hyundai Electronics Industries, and Micron Technology of the U.S. This year, the trio accounts for some 65% of global DRAM sales. In October, 1999, Hyundai became the world's biggest DRAM maker in terms of capacity by absorbing Korean rival LG Semicon Co.
And despite Korea's crisis, Samsung continued to invest through the downturn. Thus it enjoyed fat profits when the DRAM market surged again last year. Over the next five years, Samsung says, it will invest nearly $18 billion in new capacity. Although Samsung Electronics President Lee Yoon Woo says that memory will remain "the main revenue earner for years and years," the company also is making a concerted push into nonmemory, where it plans to invest $1 billion by 2002 and to quadruple sales to $4 billion by 2005.CROWDING IN. Other Asian producers have worked hard to redefine themselves since the financial crash. Singapore's Chartered Semiconductor, for example, not only struggled with its foundry business but was in the process of ramping up in standard DRAMs when the Asia crisis hit. Since 1998, when it lost $200 million, a new team headed by veterans of Motorola, Micron, and other Western companies has paid down much of its heavy debts, adopted savvier marketing, and focused more sharply on making telecom and other chips for such customers as Lucent Technologies Inc. and Broadcom Corp. Says CEO Barry Waite: "We are now virtually out of the commodity memory business," which accounts for 7% of sales, compared with 25% in 1998.
Even though Chartered is opening three new fabs this year and has another on the way, Waite believes there is plenty of demand for its foundry services to stay in the black. Analysts agree. Gartner Group's Dataquest Inc. research firm projects that the foundry business, which is dominated by Asians, will grow by 30% annually over the next two to three years. There still is a danger, of course, that in their desperation to pursue the profitable market niches of the next decade, Asian manufacturers will repeat the mistakes of the 1990s. Too many producers could pile into the foundry business and multimedia chips, killing prices for everyone.
The more optimistic view is that Asian chipmakers have indeed learned the pitfalls of reckless expansion. And because of reforms since the crisis, manufacturers no longer can count on governments and state-guided banks to bail them out. "They're much more seasoned now as corporate managers, and they can't count on governments to the same degree," says Chairman James C. Morgan of Applied Materials Inc., which now sells 40% of its chipmaking equipment to Korea and Taiwan. For the next few years at least, Asia's new chip giants can enjoy the boom.By Bruce Einhorn in Taipei and Moon Ihlwan in Seoul, with Michael Shari in Singapore and Sebastian Moffett in TokyoReturn to top