Sat, Nov 04, 2000 page18

• High-tech alliances setting a trend

  STRATEGY An increasing number of electronic device makers are entering into long-term agreements with contract chipmakers to ensure a reliable supply of chips

  • By Thomas Ker / CONTRIBUTING REPORTER
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  The recent strategic agreement between Sharp Corp and Nippon Foundry Inc, a subsidiary of United Microelectronics Corp (聯電), and the reported alliance between UMC and Ericcson are part of a trend toward the establishment of long-term relationships between wafer producers and integrated device manufacturers, analysts said yesterday.

  Pushing this trend toward longer-term alliances is the high cost of building new wafer plants, the cost-efficiency of using wafer foundry services, and concerns about wafer supply shortages next year, analysts said.

  "Foundry capacity hasn't increased a lot this year," said Eddie Wei, section chief of research at First Securities Consulting. Meanwhile, the production of 12-inch wafers next year may result in a capacity shortage as the new production process takes time to smooth out glitches, said Wei. The first 12-inch wafer plant being built by wafer foundry service provider UMC is due to start trial production in the third quarter of next year.

  "The integrated device manufacturers want to establish stronger relationships with the foundries and confirm orders early to guarantee a smooth supply of wafers," said Wei.

  Sharp on Thursday announced a long-term foundry supply agreement with Nippon Foundry aimed at meeting Sharp's fast-rising demand for flash memory and other advanced semiconductor devices required for cellular telephones and other digital equipment. To cement the agreement, Sharp is investing US$64 million in the foundry to guarantee it has access to the capacity it requires.

  Then yesterday, local media reported that Swedish telecom equipment maker Ericsson had reached a strategic alliance with UMC on Thursday and signed a contract that guarantees a steady supply of wafers.

  When contacted about the agreement, UMC said that it was not the source of the story. "The journalist did not confirm it with us first," an UMC official said. "So far, we cannot comment on that news." Ericsson's Taiwan branch would also not comment, and its head-office in Sweden was contacted, but the story could not be confirmed.

  According to the report in a local newspaper, UMC will manufacture certain integrated circuits for Ericsson on an OEM basis.

  "Ericsson's sales have not been very good, and it wants to reduce its sales costs," said Ken Cheng, an analyst at China Securities Co. "So it must use the efficiency of UMC," he said.

  The world's third largest maker of mobile phones met lowered third quarter profit expectations last month, but reported a US$405 million operating loss in its handset unit.

  An agreement with UMC may be to guarantee supplies of integrated circuits, said Cheng. More importantly, it may also lead to the kind of cooperation with UMC that competitor Taiwan Semiconductor Manufacturing Co (TSMC,　台灣積體電路公司) signed with telecom equipment maker Alcatel earlier this weak, he said.

  TSMC and Alcatel announced an agreement on Monday to embed flash memory in Alcatel's single chip bluetooth products. Because of the advanced production techniques of both UMC and TSMC, "The cooperation between integrated device manufacturers and foundries may get closer and closer, and the role of the foundry may get more and more important," said Cheng.

  The foundries are also attracting producers of communication and electronics products that include integrated circuits because of the high cost of building 12-inch wafer plants compared with the 8-inch equivalent.

  "Building a new fab is very expensive," said Connor Liu, an analyst at SG Securities. "We believe gradually only the top IDMs will continue to build new fabs, but the small and medium IDMs will increase outsourcing to foundries. This trend will continue for the long term," he said.

  While an 8-inch wafer foundry costs about US$1.3 billion, the 12-inch equivalent costs about US$3 billion.

  UMC floated 90 million American depository receipts on the New York Stock Exchange in September to raise capital for the construction of its 12-inch wafer plant being built in Tainan.

  "We see demand for ICs continuing to increase," said Liu. In an environment of slowed down fab expansion due to their high cost, IDMs will need to sign long-term contracts with the foundries to secure capacity and push sales growth, said Liu.
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