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A New Contender In The Chip Race


Like many other U.S. chip companies, Lattice Semiconductor Corp. (LSCC) in Hillsboro, Ore., doesn't make its own chips. Instead, the $210 million outfit designs chips that are used in cell phones, PCs, PDAs, and other electronic products and outsources production to contract manufacturers known as foundries. Much of Lattice's business goes to Taiwan, whose foundries are the biggest and most advanced in the world. Little of Lattice's work has gone to Japan, where chipmakers have been struggling for years.

But with semiconductors surging and Taiwanese foundries running at full capacity, Lattice Chairman and CEO Cyrus Y. Tsui is reconsidering his choice of suppliers. In March the company announced plans to team up with Japanese electronics giant Fujitsu Ltd. (FJTSY), which is building a new $1.5 billion chip-fabrication plant capable of processing silicon wafers that are 300mm in diameter with circuit lines as narrow as 90 nanometers (90 billionths of a meter). Lattice, which will invest up to $200 million in the plant, was attracted to Fujitsu because it can compete with the Taiwanese masters and because the Japanese tech giant has a long history of producing chips for its own products. As the creator of high-tech systems, from supercomputers to telecom gear, "Fujitsu's technology is more advanced that what's available from the Taiwanese," says Tsui.

That may or may not be so -- the Taiwanese hotly disagree -- but Fujitsu hopes that the new fab, scheduled to go into operation next year, will propel the company into the front ranks of the foundry industry. With the cost of building fabs skyrocketing and with Fujitsu so laden with debt that Standard & Poor's last year gave its credit a junk rating, company executives realize they can't afford to go it alone, keeping most of their advanced technology for in-house use. So they're trying to grab outsourcing business from the Taiwanese by offering customers more access to Fujitsu's cutting-edge technology in exchange for their help in funding the new fab. "In the past, we expanded for internal use, but in two or three years [the technology] was a commodity," says Toshihiko Ono, president of the company's electronic devices group. "With our new model, we can start to get our returns earlier."

Fujitsu's new strategy is just the latest sign of a movement by Japan's chipmakers to shake off the effects of the country's long recession and become more competitive worldwide. Fujitsu has a long way to go, though. While the company is only now building its first 300mm fab, rivals such as Taiwan's United Microelectronics Corp. and Taiwan Semiconductor Manufacturing Co. (TSMC) (TSMC) have been operating them for years. And it's no cinch for an established chipmaker to adopt the foundry model: IBM (IBM) has been trying for years to snatch contracts from the Taiwanese, with only mixed success.

SHAKY FINANCES

Despite the obstacles, Fujitsu's Ono says the company has no choice but to build. "Customers are seeking stable supply," he says. "To enable us to deliver, it's mandatory that we create a new 300mm fab." Given Fujitsu's precarious finances -- it owes $13.2 billion, and in the fiscal year ended March, 2003, it lost $1.1 billion on sales of $44 billion -- the company can't afford to take the plunge without outside help. Hence the new-foundry strategy.

Investors seem impressed. Fujitsu's stock price is up 107% in the past 12 months. And the consensus is that Fujitsu is in the black, with earnings for the year ended Mar. 31, 2004, estimated at $258 million.

Analysts such as John S. Yang at S&P's Asian Equity Research in Tokyo, however, see Fujitsu's new venture as an act of desperation. "I just don't see how they can compete," he says. And analyst Noriya Nishi of Credit Suisse First Boston writes in a recent report that while Fujitsu's plan is impressive, the company should be bolder and spin off its chip business. And those Taiwanese rivals? TSMC admits there are some customers looking for alternate suppliers, but Kenneth Kin, senior vice-president for marketing, says "it's not really a serious problem." Fujitsu's Ono would be satisfied simply to be an annoyance to the giants on the island powerhouse to the south. By Bruce Einhorn in Tokyo


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