Vying for a prime position in the global DRAM market, Infineon Technologies A.G. is once again turning to Taiwan for help.
The company confirmed last week that it is meeting with Nanya Technology Corp. to discuss a potential DRAM alliance, a move that would contribute to Infineon's efforts to garner enough capacity to compete with its larger competitors.
Industry sources and analysts in Taiwan believe the two chip companies will set up a 50-50 joint venture to build one or two 300mm-wafer DRAM fabs, and said the companies could possibly complete a deal by June.
Infineon executives wouldn't elaborate on the German company's discussions with Nanya or other potential partners. However, Infineon reiterated its commitment to the market.
"The current consolidation in the DRAM industry will determine which companies are strong players when the market recovers," said Jan du Preez, president of Infineon Technologies North America Corp., San Jose. "Infineon intends to remain a top-tier competitor, based on its commitment to DRAM technology development, ability to produce both volume and specialty products in the most cost-effective way, and a stable financial base."
Charles Kau, senior vice president of Nanya in Taoyuan, also confirmed talks with Infineon, without elaborating.
The industry consensus is that this is only the latest in an Infineon binge to line up additional DRAM capacity, especially in Taiwan.
Within the last month, Infineon expanded its DRAM outsourcing relationship with Mosel Vitelic Inc. and began receiving 48% of the output from ProMOS Technologies Inc.-a joint venture between the two-an increase from 38%. The joint venture also started to ramp output at its 300mm-wafer fab.
Within the same time frame, Infineon formed an alliance with Winbond Electronics Corp., which is licensing Infineon's advanced 0.11-micron technology. In exchange, Winbond will grant Infineon exclusive access to standard DRAM chips made using this technology beginning in the first quarter of 2003.
"Infineon's strategy is to expand market share through extended alliances" with Taiwan, said Andrew Lu, head of regional semiconductor research at Salomon Smith Barney in Taipei. Lu believes that Infineon's tactic of bartering process technology for capacity will pay off for the company.
"As long as Infineon continues to sell its technology to Taiwanese companies, while at the same time getting some capacity from Taiwan, the company will be able to compete."
Competition heating up
The success of Infineon's strategy could be crucial to survival in a rapidly consolidating industry, analysts said. The memory maker is expanding production against a backdrop of rising competition, as Micron Technology Inc. has been negotiating with creditors of Hynix Semiconductor Inc. to acquire the Korean company's DRAM fabs.
If the merger goes through, Micron, Boise, Idaho, will have a 35% market share, making it the No.1 DRAM manufacturer, according to estimates from ABN AMRO in Taipei. That would pose serious threats to its closest rivals, Samsung Electronics Co. Ltd. and Infineon. Infineon, in particular, would face the largest challenge, since its market share is only about 11%.
"Infineon has to expand capacity, since there will be only three to five big players that can stay in this competitive market, while the rest of them will be forced out when the next downturn comes around 2004," said Rick Hsu, a senior analyst at Nomura Securities Co. Ltd. in Taipei.
Sherry Garber, an analyst at Semico Research Corp., Phoenix, believes Infineon's strategy in outsourcing a vast quantity of added DRAMs is to shoot for a 20% global market share. In its current position, the chipmaker almost needs to double its own production figures to reach its goal.
"This is all about the ongoing quickening pace of DRAM industry consolidation," Garber said.
"If Micron acquires Hynix DRAM fabs, it will end up with over a 30% global share. Samsung will continue to expand production to try to boost its 28% share. That leaves a race between Infineon and Elpida Memory to significantly boost their production to grab the No. 3 spot in the DRAM market," she said.
Garber echoed other analysts who believe that after the smoke clears from DRAM consolidation, the remaining Big Three contenders will definitively control the market.
"First-tier OEMs and major motherboard vendors predominantly want to deal with only the biggest and most reliable DRAM suppliers," Garber said. "These are the memory vendors who will get long-term supply agreements and contract prices, which are more lucrative than slugging it out in the spot market."
The scramble for market share explains Infineon's hectic courting of Taiwan's DRAM companies, even though the supplier is ramping up 300mm-wafer capacity at its own fab in Dresden, Germany, and at its joint venture ProMOS 300mm-wafer fab in Taiwan.
Alliances with Winbond and Nanya, each of which has 300mm-wafer fab ambitions, would enable Infineon to capitalize on the Taiwanese companies' investments while footing the bill for its own larger-wafer fabs.
Nanya would make an ideal partner for Infineon because it uses trench technology to make DRAM. Infineon also uses this technology, which it jointly developed with Toshiba Corp. and IBM Corp. Toshiba has since said it is exiting the commodity DRAM business, and IBM has drastically scaled back its memory operations.
Nanya entered the DRAM market several years ago by licensing 0.18-micron process technology from IBM. However, Semico's Garber pointed out that Nanya now needs a partner to obtain the next-generation DRAM technology, which Infineon could supply.
Nanya is part of the Formosa Plastics Group, Taiwan's largest conglomerate, and operates two 200mm-wafer fabs with a total capacity of 63,000 wafers a month. Nanya, Taiwan's sole DRAM supplier for OEMs, is expecting shipments to OEMs such as Dell Computer Corp. and Compaq Computer Corp. to account for 70% of its revenue by the end of the year, rising from 40% this month, according to Nanya executives.
The company is preparing to raise an undisclosed amount through an overseas stock sale to be concluded in May, which will help fund a 300mm-wafer facility scheduled to break ground this quarter. Production is expected to come on line two years later.
"Infineon is getting more anxious than anybody else in the industry," said Helen Huang, an analyst at ABN AMRO. "It has to do something to expand market share and increase pricing power, and Taiwan is the right place to go because it's attractive as a partner."