Broadcom, Conexant Shore Up Production, Others May Feel Pinch
As demand soars, Orange County chip makers are gearing up for a capacity crunch among foundries, the outside plants that perform most of the physical fabrication involved in making semiconductors.
The situation is sparking larger chip companies to secure capacity guarantees from their producers and could leave smaller players scrambling to find companies willing to allot them manufacturing resources.
“The bigger companies have the clout and generally get all the chips they need,” said Will Strauss, president of Tempe, Ariz., research firm Forward Concepts. “It’s the little guys who find themselves at the back of the line.”
The shortage of manufacturing capacity stems from a confluence of several factors: rising demand for chips that power everything from computers to mobile phones; an industry move toward more production outsourcing; and a shortage of chip-making facilities brought on by plant shutdowns during the industry’s most recent slowdown.
Bill Ruehle, Irvine-based Broadcom Corp.’s chief financial officer, said he doesn’t expect the shortage to hurt bigger-name companies like his.
“Capacity is certainly tight,” he said. “If we didn’t have the name and visibility we do, it would be tough. I’d hate to be one of these start-ups and have to go knocking on the foundry doors asking if they could reserve capacity.”
Broadcom relies on two foundries: Taiwan Semiconductor Manufacturing Corp. and Chartered Semiconductor Manufacturing Ltd. in Singapore. The company has contracts with both producers that stipulate output levels for certain Broadcom customers. But the company has no long-term volume purchase agreements or assured capacity.
Possible Price Squeeze
In its most recent Securities and Exchange Commission filing, Broadcom officials warned investors that prices for silicon wafers, the building blocks of its chips, could rise as capacity tightens.
Officials at Newport Beach-based Conexant Systems Inc., which produces its own chips but is outsourcing more manufacturing, also are concerned. The company has invested $150 million in Taiwan Semiconductor to ensure manufacturing capacity. And this month, Conexant announced separate five-year production deals with Taiwan’s United Microelectronics Corp. and Chartered Semiconductor.
Smaller firms might not be so fortunate.
“These days, the companies that possess the capacity are almost kingmakers in the industry,” said Terry Holdt, chief executive and president at Entridia Corp., a small Irvine company that designs chips used in Internet routing equipment. “They choose who does and does not get to play.”
Holdt said his company shouldn’t have any trouble because of its relationship with Santa Clara graphics chip maker S3 Inc., which is an investor in Entridia and has ties to several foundries.
Scheduling Gets Tougher
Some larger foundry customers caught in the wrong niche of the business could face difficulty from increasingly finicky manufacturers, which are beginning to reserve their capacity for fast-growing,not just large,segments.
United Microelectronics, for one, has been courting chip makers in the communications arena, which led to its deal with Conexant.
And that could prove the saving grace for Orange County, which has a high concentration of companies in the sought-after broadband, networking and wireless sectors. Newport Communications Inc., an Irvine company that makes equipment used in high-speed optical networks, benefits from being in one of the hottest technology segments, said Joseph Vithayathil, the company’s vice president for sales and marketing.
But computer memory manufacturers, already hustling to keep up with demand, might have a tougher time, said Entridia’s Holdt.
According to the San Jose-based Semiconductor Industry Association, worldwide sales in the semiconductor industry overall will hit $195 billion this year, up nearly a third from last year, and will grow to $244 billion in 2001.
By some estimates, most foundries are booked for up to a year.
“In the old days, it was just a matter of ‘How big is your business, how much capacity do you need?’ ” Holdt said. “Those days are long gone.”
