Chinese chipmakers threaten small SE Asian rivals

Chinese chipmakers threaten small SE Asian rivals

Jennifer Tan, Reuters/Singapore

Twice a week, semiconductor executive John Nelson cloaks himself
head to toe in a white jumpsuit to pace the sterile corridors of
his wafer fabrication plant, sited by a branch of the Sarawak
river in western Borneo.

In the sanitized environment of the 1st Silicon (Malaysia)
Sdn. Bhd. factory, which produces microchips from eight-inch
silicon wafers, Nelson listens to the hum of machinery, chats
with engineers and monitors customer projects.

"On the factory floor, I walk, talk, look," said the 50-year-
old Irish chief executive.

But the business of making chips that power gadgets ranging
from computers to cellphones is no cakewalk.

Small Southeast Asian players like unlisted 1st Silicon and
Silterra Malaysia Sdn. Bhd. are struggling to gain market share
in an industry facing cut-throat competition, especially with the
mushrooming of aggressive Chinese upstarts like Semiconductor
Manufacturing International Corp. (SMIC).

1st Silicon, majority-owned by the investment arm of east
Malaysian Sarawak state, the Sarawak Economic Development Corp.,
has been loss-making since it started production in early 2001.

In contrast, SMIC, founded in 2000, earned its first net
profit in the fourth quarter of 2003 and has been climbing the
industry's rankings since. It overtook Singapore-based Chartered
Semiconductor Manufacturing Ltd. in the December quarter to
become the world's third-largest contract chip maker by sales.

1st Silicon and Silterra ranked 13th and 14th in 2003,
according to International Data Corp. (IDC), with market shares
of just 0.7 percent and 0.6 percent.

Analysts said Chinese chip players pose a mounting threat to
Southeast Asia's semiconductor industry.

"Chinese foundries like SMIC are pretty active in creating
joint ventures with the big boys and these technology exchanges
result in them moving much faster than 1st Silicon or Silterra,"
said Gartner Group analyst Philip Koh.

China is likely to remain the world's fastest growing
semiconductor market over the next three to five years. Chip
demand is expected to grow 14 percent to $53.5 billion this year,
and expand another 7.1 percent to $57.3 billion in 2006.

"China's huge domestic market is a major pull factor. Do small
chip players outside China stand a chance? It will be an uphill
battle for them," added Gartner analyst Tan Kay Yang.

Survival is the name of the game, admitted Nelson, who expects
1st Silicon to be cashflow positive this year, thanks to
stringent cost cuts.

"With a small facility, we need to try to avoid confrontation
with the SMICs of this world," he said. "We look at areas where
we are not going head-to-head with the China guys -- targeting
mid-sized customers and niche markets with higher average selling
prices. You don't have to be big to be successful."

1st Silicon, which counts Japan's Sharp Corp. as a key
customer and technology partner, produces chips for digital
cameras and mobile phones with color screens. Its single factory
processed 22,000 wafers a month as at end-2004. SMIC's four
plants have a combined monthly output of 110,000 wafers.

Bruce Gray, chief executive of majority state-owned Silterra,
argued that smaller Southeast Asian players could hold their own
against China.

"Our costs are driven not by labor, which makes up only less
than 10 percent of total costs, but by capital productivity,
which is driven by yield and operational efficiency, and that is
not a function of location," he said.

China's lack of intellectual property (IP) rights protection
is also a major deterrent, Gray noted. "There are better IP
controls in Malaysia, which has more credibility."

Kim Eng Securities analyst Dharmo Soejanto agreed. "There is
demand for chip suppliers outside China -- multinationals don't
want to put all their eggs in one basket. They see Malaysia,
Southeast Asia, as a second source of chip manufacturing."

Back-end chip testing and assembly companies like Malaysia's
Unisem Bhd. and Thailand's Hana Microelectronics PCL have less to
worry about.

"China is definitely an up and comer, but we're a couple of
years away before a parallel to SMIC emerges in the packaging
industry in China," said Gartner analyst Jim Walker.

Getting to grips with technology for chip assembly takes
longer than in manufacturing. And Chinese chip testing and
assembly firms such as Shanghai-based Global Advanced Packaging
Technology Ltd. (GAPT) are also struggling with management and
funding issues.

Nor can they compete on quality of service, said Hana chief
executive Richard Han.

"We're not worried about Chinese competition," he said.