Sat, Jan 15, 2000 page17

• Few easy options for chip makers

  GROWING PAINS Building a new fab from scratch costs billions; converting a DRAM plant is a possibility, but memory chip makers are unlikely to sell cheaply

  • By Simon Burns / STAFF REPORTER
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  After a recent flurry of expansion, the nation's chip makers have few easy options left as they try to increase capacity, analysts say.

  Taiwan Semiconductor Man-ufacturing Company (TSMC, 台積電), and United Microelectronics Corporation (UMC, 聯電) are the world's largest contract chip man-ufacturers. But despite a steady expansion program, a booming market has left them unable to meet demand. Both companies are building new facilities as rapidly as possible in the face of long-term production shortfalls.

  "There really aren't a lot of options left [for UMC and TSMC]," said Dan Heyler of Merrill Lynch.

  TSMC has expanded capacity during the past year by buying chip fabrication facilities, or fabs, such as Acer Semiconductor Manufacturing Inc and World Semiconductor Manufacturing Co. There are still a number of independent fabs remaining in Taiwan which, on the surface, appear to be acquisition targets for TSMC or UMC.

  However, most of Taiwan's unaffiliated fabs make memory chips, while UMC and TSMC need to increase their capacity in logic chips. Logic chips perform control functions in products such as computers, mobile phones and toys, whereas memory chips merely store data.

  Analysts say that roughly US$200 million and six to nine months are required to convert a memory chip fab to a plant that makes logic chips. This is still considerably faster and cheaper than building a new chip plant from scratch -- an exercise that can cost billions.

  But healthy DRAM prices mean memory chip makers are unlikely to sell up cheaply. "The best time for DRAM is now," said Don Floyd of Credit Lyonnais Securities Asia. "If they just hang in there, they're going to make a lot of money after two or three difficult years."

  Cecilia Yang, a spokeswoman for DRAM maker Powerchip Semiconductor, said there was little incentive to partner with another company.

  "We're very confident in making a good profit this year, and probably next," Yang said. "At least in the short-term, a deal with another company is not possible."

  And as time passes, buyouts become even more unlikely. "The longer you wait, the more expensive it gets, because the more you move into the cycle, the higher the [DRAM company's] stock prices go," Floyd said.

  Market rumors suggest UMC might buy a new fab recently constructed by Silicon Integrated Systems (SiS, 矽統科技), a designer of computer chips.

  SiS spokeswoman, Sylvia Lin, categorically denies this. "Impossible," she said. "The purpose of the fab is to fulfill our own needs. We have a goal to become a US$1 billion company by 2002. To reach that goal we need to have a certain degree of control of our own capacity. We would never, never sell."

  In fact, with the new fab in Hsinchu ready to start operations, SiS is now moving to purchase land for another fab at the Tainan science park in southern Taiwan.

  In addition, UMC Chairman Robert Tsao told employees earlier this week that his company will not buy any Taiwanese chip makers, according to local media reports. However, some analysts said this statement may be an attempt to dampen speculation and should not be seen as a statement of long term policy.
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