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Compeq China sales surge

Compeq Manufacturing Co (華通電腦), Taiwan's biggest maker of boards that hold semiconductors, forecast a 31 percent surge in shipments to cell-phone makers in China after moving factories to the mainland.

The predicted rise in shipments to 55 million printed circuit boards comes as the company won market share, Compeq Vice President Tong Chia-ching (童家慶) said in an interview. He added that the company won't alter its forecast for a full-year loss and that competition is getting fiercer in China.

Compeq is focusing on increasing sales to Chinese phone makers after the failure of Internet startups around the world wrecked orders from Cisco Systems Inc. and other computer-network companies. The move will bring the company closer to mobile-phone customers like Nokia Oyj and Motorola Inc. and help cut costs.

Compeq's shift "to China is a necessary move in order to control costs in a business that has experienced significant pricing pressure," said Ross Teverson, who counts Compeq shares among the $2 billion he helps manage for Standard Life Investments Asia in Hong Kong. He added that the "industry requires a broad-based recovery in electronics demand."

Compeq and rivals such as US-based Sanmina-SCI Corp. will probably scale back production and shut factories, Tong said. Such overseas companies will face increasing competition from local rivals in China who are adding to an existing glut, analysts said.

"Prices of the boards are falling" for mobile-phone customers this year, after dropping as much as 30 percent last year, Tong said. He wouldn't give the rate of decline this year.

The company didn't say how much of total sales would be accounted for by business in China.

Compeq last month changed its full-year pretax profit forecast to a loss. The company is sticking with its earlier forecast to post a pretax loss of NT$1.18 billion (US$34.5 million).

Compeq had a net income of NT$1 billion last year.

Analysts say Compeq's losses this year will mainly come from its production of semiconductor substrates, which the company supplies to Intel Corp., the world's biggest chipmaker.

Substrates, which connect to the silicon in semiconductors, are used as a medium between wiring and so-called flip chips with circuits so small that metal wires can't be attached directly to the silicon. The substrate has a larger surface area than the chip, allowing connection of metal wiring.

"I expect the flip-chip business to become increasingly important for Compeq as the company gains qualification from new customers other than Intel," Teverson said. "It should become a significant contributor to the bottom line once fully ramped up."

Compeq wasn't able to shift earlier this year to a new production technology for substrates used with Intel's latest processor, the Pentium 4, and had to dump unused inventory, analysts said. Compeq didn't comment on its business with Intel.

Intel, which made losses on its business with Compeq earlier this year, in August approved the Taiwan company's substrate technology for the Pentium 4, analysts said.

"Compeq will probably post a profit in the fourth quarter from the substrate business," said Andrew Lin, an analyst with SG Securities Corp. "Intel wants to outsource more business to Taiwan to cut cost." The Taiwanese company will take orders away from Japanese substrate suppliers such as Ibiden Co, Lin said.

Taiwan has more than 30 listed makers of printed circuit boards, according to Bloomberg data.

Compeq plans to exit the motherboard business and shift to production of boards for products that still enjoy growing demand such as digital cameras and hand-held computers.

"Overcapacity continues, and there's no sign the situation will improve," Lin said. "Companies in the US and Taiwan will go bankrupt."

Even if some of the second-tier companies close plants, there will still be overcapacity, Lin said. Some printed circuit-board makers in China are continuing to increase capacity, which may lead to prices declining further, he said.

In the printed circuit-board business, Compeq may scale back operations in Taiwan and Salt Lake City, Utah, and move some production to China to help cut costs. The market in China has grown, yet global demand still remains flat, the company said.

Standard Life's Teverson sees electronics demand recovering "gradually through the remainder of 2002 and into 2003."
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