Mon, Apr 08, 2002 page17

• Unrestricted Chartered gets an edge

  SEMICONDUCTORS Because it is not hampered by government rules on overseas investments, as are chipmakers in Taiwan, the once ailing Singapore-based firm is now getting a headstart in the China market with a new venture

  • By Dan Nystedt and Kevin Chen / STAFF REPORTERS
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  Chartered Semiconductor Manu-facturing Ltd (特許), the Singapore-based foundry chipmaker, is banking on China to help put it back in the ring against industry heavyweights United Microelectronics Corp (UMC, 聯電) and Taiwan Semiconductor Manufacturing Co (TSMC, 台積電) of Taiwan.

  Chartered is already working with China's top chipmaker, Semiconductor Manufacturing International Corp (SMIC, 中芯國際集成電路), on state-of-the-art 0.18 micron chip-etching technology, and recently concluded a technology forum in China last week to draw in more partners.

  "Everyone wants to move to China because of its potential. A lot of downstream electronics makers have already moved to China and are pushing upstream companies [such as chip manufacturers] to move there," said Connor Liu, semiconductor industry analyst for SG Securities in Taipei.

  The advantage for Chartered is two-fold -- the company has been able to build both a brand name and a client base in China, the world's fastest growing semiconductor market, while its Taiwanese competitors remain conveniently out of sight. With the slow pace in the formation of government regulations,analysts say that major chip investments will not be able to conduct large-scale operations in China until the second quarter of 2003.

  The market for semiconductors in China is expected to grow 6 percent this year to around US$11.4 billion, according to market researcher Dataquest.

  Although Taipei remains wary of its political rival, Singapore places no such restrictions on its chipmakers, and the sector's third-largest company, Chartered Semiconductor, is set to take advantage of the situation.

  "If Taiwanese chipmakers are still not allowed to invest in China, then Chartered Semiconductor is going to dominate that market. We want to become a rule-setter not a rule-follower in China," said Gordon Chen (陳文咸), president of the Taiwan Semiconductor Industry Association (台灣半導體協會), during a conference two weeks ago.

  Chartered's cooperative efforts with SMIC have helped it to gain 0.18 micron manufacturing technology, a high-end process that commands better profit margins, nearly a year faster than it would have been able to do on its own.

  In return for helping SMIC with its chipmaking technology, Chartered gains an equity stake and the right to some of SMIC's production capacity.

  It may also gain customers.

  By using Chartered's technology, SMIC's customers will all be able to shift orders to Chartered and vise-versa, SG Securities' Liu said.

  When a customer such as Motorola Inc or Advanced Micro Devices Inc chooses a foundry chipmaker as a partner, they rarely make changes. It's costly to change companies because differing manufacturing processes require slightly different chip designs.

  Working in China could help Chartered become a contender in the foundry business again, making chips to the design specifications of customers. TSMC and UMC currently dominate such business, controlling of over two-thirds of the market.

  Following the chip downturn last year, Chartered lost US$384 million -- 83 percent of its net revenues -- and fell to a distant third place behind its Taiwanese rivals. The company appeared to have fallen completely off the map. Not any more, analysts say.

  Building a customer base

  The more technology agreements Chartered is able to sign with Chinese chip firms in their developing years, the larger Chartered's potential customer base. It also gains production capacity from its partner chipmakers in China, where the electronics industry is rapidly moving, therefore it does not need to invest in its own chip production facilities, which can cost between US$1 billion to US$3 billion depending on the technology involved.

  The gravest danger for Chartered appears to be the potential of helping build a strong competitor in one of the Chinese foundries.

  "You have to be careful not to help your competitor ... but the benefit of gaining access to capacity in China far outweighs concerns about transferring our technology," said Bruno Guilmart, a regional president for Chartered Semiconductor.

  Taiwan's chipmakers are closely watching Chartered's moves in China.

  "SMIC is becoming another trouble maker to the industry -- just like Hynix -- as it is likely to generate price wars. SMIC is under heavy financial pressure as it is operating a new eight-inch wafer plant which is much more costly than those in Taiwan. Consequently, SMIC has to adopt a cheaper pricing strategy in order to bring in fresh capital as soon as possible," Chen said.

  "For example, eight-inch wafers from SMIC cost about US$800 each while Taiwanese makers sell them for US$1,600 to US$1,800 each," he said.

  Late last month, the Taiwan government said chipmakers would have to wait until April 30 to see a draft of the final regulations they will have to abide by in order to invest in China. By May 10, those regulations would be sent to the legislature.

  Critics of the plan believe political bickering could still derail the draft. Even if all goes smoothly, Taiwan's chipmakers could face a much longer wait than anticipated -- perhaps over two years, by some estimates. If that happens, analysts say, Chartered would be firmly in control of the market in China.
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