Having struggled for years to gain the credibility its larger Taiwanese foundry rivals enjoy, Chartered Semiconductor Manufacturing Ltd. is taking more aggressive measures to polish up its image, and in the process boost its bottom line.
Chartered last week outlined a plan to cut costs and restore profits that centers on closing older fab lines and pushing leading-edge technologies, while securing a larger stake in China's emerging foundry market.
The Singapore company is hoping an emphasis on advanced processes will attract strategic partners and bring in more "first source" designs that carry higher average selling prices and margins. A $120 million investment announced last year to codevelop 90nm technology with IBM Corp. will go a long way toward that goal, said president and chief executive, Chia Song Hwee.
By the end of 2004, Chartered expects at least half of its capacity will be in 0.18-micron or smaller geometries, up from 15% in 2002. As much as 26% of revenue will be from 0.13-micron, up from just 1% at the end of last year. This shift will take place without new capacity additions or changes to its $275 million 2003 capital spending plan.
"In order for us to have room to grow, we have to resize the capacity of older technologies," Chia said in an interview with EBN. "We are reducing mature capacity in order to make room for growth in 0.18- and 0.13-micron."
The first step will be to phase out Fab 1, a 6-in. wafer factory, and consolidate production into Fab 2 by March 2004. Fab 1 has a capacity of 15,000 wafers per month, processed at 0.5-micron and larger geometries. Fab 2, with capacity of 43,000 8-in. wafers per month, uses 0.5- and 0.35-micron processes.
Chartered will look to either sell the Fab 1 equipment to a foundry in China, or exchange it for an equity stake. The company has a small stake in Semiconductor Manufacturing Internional Corp. (SMIC), Bejing. Chia said Chartered is in discussions with potential partners to extend its reach beyond SMIC, but declined to say more.
A joint venture with an established Chinese foundry could be lucrative and would bring a more rapid return on investment than a start-up deal, which could take years to get off the ground, said Len Jelinek, an analyst at iSuppli Corp., El Segundo, Calif.
Meanwhile, closing Fab 1 will bring Chartered's leading-edge capacity mix by revenue closer to parity with rivals Taiwan Semiconductor Manufacturing Co. Ltd. and United Microelectronics Corp.
The company recently stepped up its effort to make pre-qualified IP, libraries, and EDA tools readily available for its advanced processes, and will spend three-times more on this in 2003 than in 2002, Chia said, though he declined to quantify the investment.
This action alone won't make Chartered profitable, but it could shorten the time it takes for them to reach profitability," said Daniel Heyler, an analyst for Merrill Lynch, who is based in Hong Kong.
"It's tough to make money at 40% utilization," Heyler said. "The question is, can Chartered be operationally profitable at 60% utilization? It seems to me they should be able to."
Even then the company will face a new struggle: how to stand out in a growing field of players in the 0.18- and 0.13-micron arena, said iSuppli's Jelinek.
"Chartered has always had this problem of being the guy who was second fiddle," he said. "As they and others move farther down into the leading edge, they will continue putting in capacity that's going to drive a price war.
"How are these guys going to make money, which is what Chartered's problem has been all along," he asked.
Some analysts also wondered why Chartered isn't more aggressively shutting down older fab lines.
In some cases, Chia said, aging fabs can be converted to leading-edge processes for less than the cost of installing the same capacity on new equipment.
"We would only need to spend about $20 million to add 6,000 wafers of 0.18-micron output in Fab 3 vs. $120 million if we were to do so in fab 6," he said.
The capacity realignment is expected to result in annualized cost savings of $25 million. Chartered said it will take a one-time, pre-tax charge of $18 million to $22 million for the fab closure and layoff of 500 employees.