SEMICONDUCTOR

UPDATE 

September 2006

McIlvaine Company

Government Decides Not to Permit Hynix to Expand Plants

A 13-trillion-won investment plan by Hynix Semiconductor Inc. is unlikely to win the government's approval. Businesses say this reveals the level of commitment of the Korean government to deregulate and stimulate corporate investment.

The Ministry of Finance and Economy has virtually decided not to permit the chipmaker to expand its manufacturing facilities in Icheon, some 45 kilometers southeast of Seoul.

Hynix, the world's No. 3 computer-chipmaker, had sought a relaxing of existing regulations which bar construction of new factories in Seoul and its surrounding Gyeonggi Province. It also sought permission for the industrial use of a 57,000-pyeong site in Icheon, which under current rules is off-limits to factories due to environmental reasons. (1 pyeong equals 3.3 square meters.)

Hynix officials hoped to build three 300-millimeter Fab production lines with a budget of 13.5 trillion won ($142.5 billion) by 2010 in the area. It has secured an 18,000-pyeong lot but needs 57,000-pyeong more for the facilities.

Creating as many as 6,000 jobs, the project is believed to be the single largest investment plan in Korea, equivalent to a full-year facility investment by the country's largest Samsung Group.

"A total of six firms, including Hynix, asked for amendment of the current regulations that bar companies from building factories in the Seoul metropolitan area. However, the Hynix case is different from the others," said a high-ranking official at the ministry.

"It is not like the company would have to find a location overseas if not (in Icheon). Hynix has an alternative site in Cheongju. It would be difficult for the ministry to allow new facilities in Icheon because it runs against the policy of a balanced development of national territories," he explained.

Earlier in the year, the government said it would revise regulations so that firms have an easier time building new facilities in the capital area encompassing Seoul, Incheon and Gyeonggi province. The government is set to announce a set of deregulatory measures this month.

The government has tightly restricted companies from building or expanding their facilities in the Seoul metropolitan area. It is intended to break up the concentration of power and wealth in the area which accounts for 47.6 percent of the country's population and nearly a half of the country's gross domestic product.

Business circles and some economists expressed disappointment at the government's stance and renewed their calls for sweeping deregulation.

In a report, Hyun Seok-won, a researcher at the Hyundai Research Institute, said deregulation is the key to stimulating corporate investment and firing up the country's slackening economy.

"Japan could come out of the long economic slump and a slackening of facility investments because of the central government's strong deregulation drive," he said.

The Korean government should take a cue from Japan and relax strict regulations on conglomerates and manufacturers, he said.

High-tech Consumer Sales Account for 40 Percent of Semiconductor Market

Today high-tech consumer sales account for 40 percent of the semiconductor market, according to the Semiconductor Industry Association. That marks a recent change in the industry, which has historically relied on corporate computer spending to fuel growth.

Worldwide, the semiconductor industry is on track to reach record sales of more than $240 billion, according to George Scalise, president of the Semiconductor Industry Association.

Through the end of July, U.S. semiconductor sales were up almost 18 percent over the previous year, according to a recent SIA report.

Semiconductor manufacturers are running at 89 percent to 91 percent capacity, the trade group said.

In Clark County, they're even busier, with some companies turning away less-profitable business and others running production lines above their engineer-sanctioned maximum capacities.

That's been the case at the WaferTech custom chip foundry in Camas, which prints computer circuits onto silicon wafers. Production, measured in "wafer outs," has gradually increased from 10,000 wafer outs per month when WaferTech opened in 1998 to roughly 36,000 wafer outs per month today, said Facilities Manager Jim Short.

The company is investing steadily in capital improvements to expand production, with $23 million spent so far this year, according to corporate reports. Demand is so strong that workers are pushing machines beyond 100 percent of capacity, which is possible because the actual output of the machines is higher than the theoretical output, Short said. Parent company Taiwan Semiconductor Manufacturing Co. aims to keep the Camas facility running at or above capacity, Short said.

Sales and Profits

Strong demand and high prices for silicon wafers has also benefited Isonics in Orchards, which recycles silicon wafers. "There's more demand for reclaimed products now," because silicon prices are high, said Joanna Lohkamp, general manager and chief of operations.

That focus has turned around a once-struggling business, bought by Isonics in 2004 from EnCompass Materials Group Ltd. "Until August, Isonics had never turned a profit with the facility, and I don't believe the predecessor, EMG, had turned a profit for quite some time," Lohkamp said.

With one profitable month achieved, she now is focused on continuing to make profits at the busy Vancouver plant, where 53 people work.

Kokusai Semiconductor, a Japanese-owned company with U.S. headquarters in Vancouver, predicts a 57 percent increase in machine sales over the next six months, compared to the same period a year earlier, Bernardi said. "That's zooming."

The company, which sells machines used by chipmakers, has hired 31 workers this year, bringing total employment to 100 nationwide and around 30 in Clark County.

Kokusai's machines are manufactured abroad and sell for $800,000 to more than $2 million, depending on configuration. Demand is particularly strong for machines to produce 12-inch silicon wafers, which can then be used to make memory chips used in flash cards, computers and iPods, Bernardi said.

Jobs and Investment

Linear Technology has hired 40 people this year, bringing total employment at its Camas semiconductor plant to just over 290, said Jim Lucey, human resource manager.

Net sales for the California-based company in the most recent fiscal quarter were $292.9 million, up from $255.8 million during the same quarter a year earlier, he said. With room to grow, Linear is in the process of adding equipment to further expand its production, Lucey said.

SEH America, which makes 8-inch silicon wafers at its sprawling Orchards plant, is also hiring -- adding about 15 new workers each month, said Gary Jenks, company spokesman. It now has 871 employees on site, though 162 of those workers are employed through staffing agencies.

SEH still awaits word from its Japanese parent company, Shin-Etsu Handotai Ltd., on whether the plant will be the site of more than $350 million in investments to develop 12-inch wafer production.

In March, the company won state water rights needed for the expansion, and since then SEH America has imported new machines for a 12-inch wafer pilot project. 

Will it last?

The industry has boomed before, and historically highs have been followed by troughs -- a jagged up and down Bernardi calls the "sawtooth effect." "People have argued in the past few years that the sawtooth effect is softening," he said. "But frankly, this industry is noted for going great guns and hitting an overcapacity situation, then hitting the breaks real hard. That's everybody's fear."

The health of the industry rides on strong sales, and nobody surveyed by The Columbian could predict how sales will fare beyond 2007. But this year's strong markets are a relief from a chip-industry slump that began with the closure of AVX Corp.'s Vancouver plant in 2001, resulting in 800 lost jobs.

Since then, high-tech industry employment has generally been flat. This year, that changed. In the 12 months through August, Clark County has added 300 computer and electronic manufacturing jobs, a 9.7 percent gain, according to the state Employment Security Department. That hiring outpaces the 3.3 percent average county job growth. Tech and scientific services jobs are up by 100 jobs, a 1.6 percent gain, despite possible cuts at Hewlett-Packard Co.

Semiconductor companies surveyed by The Columbian provide more than 2,600 of the county's 132,700 jobs -- that's just under 2 percent of total Clark County employment.

Market Worries

Bernardi worries that growing dependence on consumer electronics sales could hurt the industry if gas prices, rising mortgage rates or other economic factors force families to cut back discretionary spending.

One recent troubling sign: At some electronics stores, consumers don't seem to be emptying shelves as fast as inventory arrives, according to a Sept. 15 Wall Street Journal article. Meanwhile, prices are up for argon gas, used in silicon manufacturing. And, polysilicon is in worldwide short supply, in part due to growth in the solar power industry, which competes for the commodity. "Costs for materials continue to be a large factor for us," Jenks said.

It's enough to make Bernardi question recent double-digit industry growth. "Is this growth rate sustainable? Probably not," he said. But Bernardi is hopeful that the next downturn will be less severe than its last.

Meanwhile, others remain optimistic. "Everything we see at this point indicates that there is no slowdown in sight," Jenks said.

JPSA Begins Move to New Manchester, New Hampshire Facility

J P Sercel Associates (JPSA), a supplier of laser micromachining and wafer processing technology, has begun moving from its Hollis, NH headquarters into the company's new 35,000 sq. ft. facility in Manchester, NH, approximately thirty minutes north of its current location. The company's purchase of the building was announced earlier this spring. The purchase and relocation was prompted by JPSA's need for more office and manufacturing space, as part of JPSA's extensive growth in systems manufacturing and job shop services.

The modern building itself is the former French Hall, once part of the University of New Hampshire, and is strategically situated in the Hackett Hill Research Park in Manchester, New Hampshire. The setting is a wooded high tech research and light industrial park with 10.5 acres of land, permitting phased growth

JPSA has invested heavily in the new building, Sercel says. From upgrading electrical utilities to the construction of a shipping dock, there have been many improvements.

Chip Production Set to Post Double-Digit Growth in 2006

VLSI Research Inc predicts chip production will increase 12 percent in 2006. Measured in terms of silicon consumption in millions of square inches, chip production will reach 5995 msi this year. It is in stark contrast to the previous year, when silicon consumption grew at a mere 2.8 percent, and reminiscent of the boom year of 2004 when it grew 14 percent.

On a quarterly basis, chip production fell close to 1 percent in 1Q06 from 4Q05, but grew almost 4 percent in 2Q06. VLSI Research expects a steady quarterly growth through the rest of the year given that the second half is seasonally strong due to the holiday season.

The major driver to this has been the tremendous growth in IC units produced. According to the WSTS, the industry shipped 77.8B units of IC from January to July. This figure is 24 percent higher than the comparable period of 2005. In particular, NAND Flash shipments have been running 55 percent above the levels of 2005.

Chip capacity has not grown as fast as production. On a quarterly basis, capacity grew 1.7 percent in 1Q06 and 2.8 percent in 2Q06. VLSI expects quarterly growth to clock in at roughly 2.5 percent for the rest of the year. On an annual basis, chip capacity is expected to increase to 6377 msi of silicon, 6 percent above 2005.

With capacity growth lagging that of production, utilization rates have hovered above 90 percent for most of the year. We expect to see rates climb up to 95 percent for the remainder of 2006.

Shin-Etsu to Increase 300mm Silicon Wafer Production to 1 Million in 2007

Shin-Etsu Chemical Co., Ltd. has announced a new plan to expand its monthly production capacity of 300mm silicon wafers to 1,000,000 by the fall of 2007 utilizing its Group’s comprehensive strength as the world’s largest manufacturer supplying 300mm wafers, for which global demand is rapidly growing. Construction to expand facilities has already started. This expansion will enable Shin-Etsu to establish a production system, which will promptly meet the rapidly growing its customers’ demand worldwide, and to fulfill its responsibilities as the world’s top maker of 300mm silicon wafers.

Shin-Etsu Chemical had been working to implement its plan to expand its Group’s total production capacity of 300mm silicon wafer to 500,000/month by the fall of 2006; however, due to the continuation of robust demand, this project was completed earlier than planned and its Group’s total production capacity has been currently increased to 700,000/month. Furthermore, since semiconductor customers are expected to newly construct or expand their production lines that make use of 300mm wafers, Shin-Etsu has now decided to establish a production system of 1,000,000 wafers/month by the fall of 2007. The investment amount made for an additional capacity of 300,000 wafers will be 120 billion yen, and the accumulated amount invested in the 300mm wafer business by Shin-Etsu, including that of this investment, is expected to reach about 400 billion yen, all amount of which is covered by Shin-Etsu’s own funds. As of the end of August 2006, Shin-Etsu Chemical had cash reserves of about 530 billion yen.

This latest expansion plan was decided upon by Shin-Etsu after taking into consideration all kinds of risks, including natural disasters such as earthquakes, damage caused by winds and floods and other such risks. The expansion plan will be carried out at Shin-Etsu Handotai’s Shirakawa Plant, which has been playing a leading role in high-precision wafer processing; Shin-Etsu Handotai America (SEH America); and Mimasu Semiconductor Industry Co., Ltd., which became a Shin-Etsu Group company this year. In addition, Shin-Etsu will make a new investment in Nagano Electronics Industrial Co., Ltd., another Shin-Etsu Group company. These investments will lead to the strengthening of Shin-Etsu’s strategy of making use of strong multiple global production bases that can assure stable supply to customers

Furthermore, in addition to the planned expansions at the Shin-Etsu Handotai’s Shirakawa Plant in Japan and at Shin-Etsu Handotai America’s facilities in Vancouver, Washington, to disperse risk, it was decided to produce single crystal ingots at Shin-Etsu Handotai’s Takefu Plant (in Fukui Prefecture, Japan). By means of these multiple production bases, an early increase of production capacity will become possible that will promptly meet changing market needs.

AMD Converting Fab 30 into a 300 mm Fab and Adding Capacity to Fab 36

AMD is converting Fab 30 into a 300 mm fab (it will then be known as Fab 38) and adding capacity to Fab 36. The Luther Forest fab -- which AMD is calling Fab 4X -- also will be a 300 mm fab.

In announcing the New York plans June 23, AMD said it would like to start construction on the 1.2 million-square-foot Luther Forest factory between July 2007 and July 2009, with the plant becoming fully operational by 2012 at the earliest.

But interviews with company officials in Austin reveal that when, and ultimately if, the Luther Forest chip fab is built depends on a number of factors including how fast AMD and the semiconductor industry grow and how well the Dresden facilities perform.

Preston Snuggs, vice president of manufacturing for AMD, said the upgrades being made to Fab 30 and Fab 36 — a $2.5 billion project that includes $600 million in incentives from Germany and the state of Saxony — should take care of the company's manufacturing needs through 2008 or 2009. At that point, AMD will be able to produce 45,000 wafers a month in Dresden, which will quadruple its capacity there.

Private Investors to Buy Freescale for $17.6 Billion

Freescale Semiconductor Inc. agreed to be bought for $17.6 billion in the largest private buyout for a technology company. A group of private investors led by the Blackstone Group and including Carlyle Group, Permira Funds and Texas Pacific Group will buy the Austin-based chipmaker, which employs 3,100 people at manufacturing and research and development facilities in Chandler and Tempe.

The investors propose paying $40 a share, or 30 percent more than the stock price was a week ago, before the company disclosed that it was in discussions about being acquired.

The deal isn't final, and Freescale has up to 50 days to seek other offers. It would pay a breakup fee as high as $300 million to choose another suitor, but Blackstone would have to pay a similar amount to abandon its offer.

Other investment groups, including one headed by Kohlberg Kravis Roberts & Co., also might be interested in Freescale, according to reports.  But the deal is a potentially huge windfall for employees and shareholders. It's also a vote of confidence in Freescale, whose July 2004 initial public offering was largely scorned by investors.

Shares that brought just $13 a share then have more than doubled in the past two years, as new Chief Executive Michel Mayer and a senior management team revived sales and profits. The shares closed Friday at $37.16. The deal was announced after the market closed.  If the company does well, he said the investors could try another stock offering in three to five years.

Freescale, once part of Motorola Inc., had 2005 revenues of $5.84 billion and a profit of $584 million. It has 24,000 employees worldwide, including 5,400 in Austin.

The company, which has a 56-year history in the semiconductor business, is the world's largest supplier of microchips for the global automobile industry as well as a major supplier of chips for Motorola cellphones and communications equipment.

Infineon opens front-end fab in Malaysia
Infineon Technologies AG formally opened on September 12 its first Asia-based front-end power fab in Kulim Hi-Tech Park in Kedah Darul Aman, Malaysia. Employing about 1,700 people, the $1 billion facility, dubbed Power Fab, will have a maximum capacity of 100,000 wafer starts per month using 200mm wafer discs. It will produce power and logic chips for various industrial and automotive power applications.

Leading the ceremonial ribbon cutting were Seri Rafidah Aziz, Minister of International and Industry of Malaysia; Chong Itt Chew, Kedah State Executive Councilor for Industry, Transportation, Trade, Consumer Affairs and Community Welfare; Infineon president and CEO Wolfgang Ziebart; and Infineon Technologies (Kulim) chairman Reinhart Ploss.

Infineon regards the Kulim plant as a strategic investment into its future and "an opportunity to address the world's growing demand for more efficient power controls in industrial, computing and household appliances by enabling variable speed-controlled electric motors with higher performance." Rapidly increasing energy demand is one of the key challenges for growing economies in Asia. Technological solutions are thus needed to reduce power consumption and increase energy efficiency. The Kulim plant is committed to creating leading-edge products and using state-of-the-art technology to facilitate safe and efficient use of dwindling energy resources.

Completed in just 12 months, the new fab will produce power ICs that enable efficient energy management. Infineon's CoolMOS ICs allow completely new system approaches for power supplies, such as in servers, PCs and laptops, and for battery chargers in cellphones or PDAs. Its IGBT chips enable new drives in household appliances such as refrigerators and air conditioning systems, and other industrial applications. The chips' low inner resistance and switching behavior ensures the efficient use of electrical energy and the minimization of waste heat. Applications include engine control, ABS and airbags as well as lighting control, electrical window lift, seat adjustment and door locks.

China Chip Growth Outpacing the US

China's chip makers will spend US$9.8 billion expanding production capacity between 2006 and 2008, according to research. The total capital expenditure on chip production in China over the next three years will be substantially greater than the US$8.7 billion spent over the past five years by US chip makers, reported the SEMI industry association. 

Spending on chip-making equipment in China will surge from US$1 billion last year to US$2.55bn in 2008, the association predicts, based on interviews with industry executives and government officials.

While Chinese chip makers still lag some way behind the cutting edge, the country's technology is being steadily upgraded.

Chip manufacturing plants, which build chips on large 12" (300mm) wafers and use more advanced technologies, are becoming "major drivers for capital spending in the China market", SEMI reported.

Spending is driven by surging demand from China's huge electronics manufacturing industry. Chinese companies spent $40.5 billion on chips last year, an increase of 32 percent year-on-year, according to research. 

Beijing-based research firm Analysys International puts the Chinese chip market's value even higher, at around US$46 billion in 2005. However, only about a quarter of this demand, around US$9 billion, was met by local manufacturers.

Although prospects are positive for China's existing chip makers, the free-for-all period is coming to a close as the Chinese market becomes less open to new players, according to SEMI.

"Investment trends are evolving in China, and the future is more promising for new entrants," said Mark Ding, president of SEMI China. "Fab projects that bring advanced technology and significant foreign investment will find financing and government support more readily available." However, fabs that fail to get strong government backing or support from foreign partners will have difficulty breaking into the market in the future, according to Ding. SEMI's forecasts also suggest that the market for second-hand chip making equipment is increasing in size as a proportion of the total market.

Between 2006 and 2008, second-hand equipment sales to Chinese fabs will rise from 15 percent to 25 percent of the total, the organization predicts.

Most Chinese chip makers make heavy use of second-hand equipment, with some outfitting their fabs almost entirely with used machinery imported from abroad.
But they are able to do this only because their production facilities are several years behind the leading edge.Typical second-hand chip equipment prices are just 60 to 70 percent of new prices. This represents substantial savings on outfitting costs that can be measured in the high hundreds of millions of dollars.

Fab City Project Is Facing Technological Hurdles, Raised by the Government

The tussle between finance ministry and information technology department over sops for the semiconductor industry and chip making facilities is upsetting calculations of the likes of Intel and AMD which is a partnering a group of NRIs promoting SemIndia.

SemIndia's much-touted Fab city project, predicted to change the face of the semiconductor industry in India, has is facing technological hurdles, raised by the government.  The ministries are locking horns over the use of technology for the project and whether the technology should be entitled for grant of government subsidies and tax incentives.

More Plants to Be Allowed in Seoul

The government is considering easing a set of restrictions on the construction of plants in and around Seoul to help boost investment and create more jobs.

Deputy Finance and Economy Minister Kim Seok-dong said that six companies, including Hynix Semiconductor, have expressed a desire to invest in Seoul and its adjacent area.

Hynix plans to invest 13.5 trillion won to construct new chip-making factories and expand existing facilities in the Seoul Metropolitan area.

Many companies prefer to have their plants and other business facilities in the region compared to provincial areas for easier access to the market and overseas shipping. The current regulations have often been blamed for forcing some local firms to shift their productions to China and other countries.

"As of now, six large and medium-sized companies want to invest in Seoul and its surrounding area. The government has been considering a range of measures aimed at easing regulations and creating a more business-friendly environment, including allowing companies to invest in the metropolitan region," Kim said.

He said the government will make a decision as early as later this month.

"Although the government has restricted building factories and other industrial activities in Seoul areas to prevent over-development and encourage companies to invest in provincial areas, we have also allowed companies to expand their businesses at times if deemed essential for national development," Kim said.

Last month, Deputy Prime Minister and Finance and Economy Minister Kwon O-kyu also said the government was considering relaxing development restrictions, adding that it plans to examine the regulations and decide how it will ease them in a bid to help boost the nation's industrial competitiveness.

Kim also said the economy is currently experiencing a temporary slowdown due to labor unrest and damage from seasonal rain, stressing there is no possibility of a sharp downturn.

“It is somewhat premature to predict that the economy may cool off down the road, based on current business conditions. We need to assess where the economy is going after reviewing key indicators for August,” Kim said.  He also said the ministry will stick to its initial macroeconomic policy stance, while supporting the construction and other sluggish sectors through fine-tuning measures.

Micron Equips Facilities

Micron Technology and its Joint Venture partner Intel Corp through its IM Flash Technologies, NAND Flash manufacturing partnership are currently ramping Micron's existing 300mm facility in Manassas, Virginia as well as completing cleanroom facilities for first phase tool install at Lehi, Idaho while converting a 200mm fab to 300mm DRAM production at TECH Semiconductor, a Micron fab in Singapore.

Japanese Chip Maker Renesas Technology Breaks Ground for Vietnam Operations

Renesas Design Vietnam Co’s (RVC) new building will come up on a 2ha-site in Ho Chi Minh City’s Tan Thuan Export Processing Zone. It is set to open in September, 2007. The new facility would scale up RVC’s investment in Vietnam to US$30 million from the current $13 million, a company official said.  While the construction would cost some $4 million, money was set to be pumped into advanced facilities for manufacturing semiconductors, LCD driver ICs, system-on-chip, and high power amplifiers among others. The company has teamed up with local universities to train engineers for the new facility. It plans to increase the number of engineers on its payroll from 100 to 500 in two years.

Established in 2004, RVC was the first major chip design company in Vietnam. It supplies products to Renesas subsidiaries worldwide, mainly for mobile, automotive, and digital consumer applications.