Analysis: Shelving fab plans could make SIS stronger

Beset by manufacturing problems and the ongoing slump in demand for semiconductors, Silicon Integrated Systems (SIS) has cancelled plans to build a fabrication plant (fab) to produce chips using 300-millimeter silicon wafers in a move that could help make the chip maker more competitive against competitors like Via Technologies and Intel.

"The (300-millimeter) fab plan is now stopped," said Jessie Lee, a spokeswoman for the company.

The cancellation of its 300-millimeter fab plans is part of the company's strategy to become a fabless IC (integrated circuit) design house and should improve the company's long-term prospects, according to Dan Heyler, head of Asia-Pacific semiconductor research at Merrill Lynch (Asia-Pacific) Ltd.

"Going forward, they will have higher viability and an increased chance for success," he said. "The 300-millimeter (fab plan) was never viable."

SIS's decision to shelve its 300-millimeter plans comes as contract chip maker United Microelectronics Corp. (UMC) moves to boost its investment in the company. UMC acquired a roughly 10 percent stake in SIS on Monday for US$103.8 million, according to Alex Hinnawi, a spokesman for UMC. That brings UMC's holdings in SIS to more than 15 percent, he said.

At present, SIS is the only third-party PC chipset maker that produces its own chips. Rival chipset makers Via and Ali Corp. do not have their own manufacturing facilities and rely on contract chip makers like Taiwan Semiconductor Manufacturing Co. Ltd. (TSMC) to produce their chipsets. Chipsets are the main interface between the components of a PC, such as memory, peripherals and the processor.

SIS manufactures its chips using 200-millimeter wafers at a fab in Hsinchu, Taiwan, which has a capacity of 26,000 wafers per month and can be increased to 40,000 wafers per month, Lee said. The ability to expand production at this fab makes construction of an additional manufacturing facility a less pressing priority for SIS, she said.

However, to remain competitive with rivals like Intel over the long term, SIS will need to eventually switch to production using 300-millimeter wafers. The larger wafer size allows more chips to be produced on each silicon wafer and can reduce production costs by as much as 35 percent, according to industry estimates. The problem is that constructing these fabs and fitting them out with the required equipment is extremely expensive, running into billions of U.S. dollars, and chip makers expect those costs to continue to rise in the coming years.

"More and more, we have to have larger capital expenditure," said Yoon Woo Lee, president and chief executive officer (CEO) of Samsung Electronics Co. Ltd., speaking Monday at the Silicon Sea Belt Summit 2003 in Fukuoka, Japan.

"In the past, equipment costs represented 55 percent of the costs of a fab, but now it is 70 percent and in 2005 it will be 85 percent," Lee said, adding that research and development costs related to chip manufacturing are "gigantic" and present another serious challenge for chip makers.

The rising costs of go-it-alone chip manufacturing were a major factor in the decision by SIS to cancel its 300-millimeter fab plans. The company originally opted to manufacture its own chips several years ago, hoping that a vertically-integrated business model would offer greater cost and technology benefits, Lee said.

However, ongoing problems with yield, the term used to describe the percentage of viable chips that are produced at a fab, and a soft economic environment have led the company to reconsider its strategy and to contemplate whether to sell its existing fab in Hsinchu and contract out all of its chip manufacturing, she said.

"We will think about this question very seriously," Lee said, adding that "there are no plans to sell this fab right now."

If SIS does decide to give up chip manufacturing, the company is likely to rely closely on UMC, which has a 300-millimeter plant in Tainan, Taiwan. In a sign that the SIS is already headed in this direction, the company has begun planning to shift over some wafer production to the Taiwanese contract chip maker, Lee said.

The closer relationship between SIS and UMC and UMC's growing stake in SIS comes after the U.S. International Trade Commission (ITC) ruled in October 2002 that SIS had infringed on a manufacturing-process patent owned by UMC. In that ruling, ITC restricted the import of chips manufactured using the affected process to the U.S. The ruling affected all chips made by SIS using the process, including chipsets and the Xabre graphics chip.

As part of an agreement between the two companies in the aftermath of that decision, the companies agreed to work more closely together, with SIS relying on UMC for some production capacity in exchange for protection against further legal action over patent infringements, Merrill Lynch's Heyler said.

"It allows them to go on selling," he said.

(Martyn Williams in Tokyo contributed to this report.)