Expecting continued slow sales this quarter and the next, Conexant Systems Inc. has written off $17 million of a deposit paid to a contract chipmaker, according to a recent filing with the Securities and Exchange Commission. Conexant was set to get the deposit back if it sold enough chips.
The write-off underscores the tough conditions facing many chip companies, which have seen demand fall dramatically since last year. Conexant has been particularly hard hit, and has been shifting its manufacturing from in-house facilities to outside foundries to cut costs.
“Running a fab is a huge cost,” said Conexant spokesman Scott Allen. “It makes the foundry model very attractive.”
Conexant called deposits to guarantee a volume of purchases not unusual. But an industry observer and a chip industry source called Conexant’s arrangement unique.
Under terms outlined in the filing, the unnamed chip plant, or foundry, would draw down the deposit as wafers were purchased by Conexant during a specified period. But Conexant executives decided demand wouldn’t be enough to meet terms of the deal with the manufacturing facility.
Conexant declined to identify which foundry required the deposit, except to say it works with several contractors to produce chips.
“As a result of current and projected business conditions, management expects that purchases during the remaining term of the arrangement with this foundry will be insufficient to fully recover the advance deposit,” the company said in the filing.
Conexant’s move to write off the $17 million,part of a half-billion-dollar write-off last quarter,comes as it tries to find a single foundry to produce its entire generic chip line.
“Chip companies use a variety of tactics to get the capacity they want,” said Conexant’s Allen said, adding that paying a deposit is nothing new for chip companies.
One such tactic involves making investments in a foundry to secure volume and favorable pricing. Other chip companies simply work with more than one of the major foundries to get the chips they need.
“They need to develop a relationship that gives the company a preferential price and volume,” said Jim Feldhan, president of SemiCo Research Corp. “I haven’t heard of a deposit, though.”
Securing adequate manufacturing is important for chip companies. In the good times, when chip companies are selling chips faster than the foundries can make them, it pays to have a guaranteed amount of volume at a specific price, and companies that have long-term contracts win out, analysts say. But in the bad times, chip companies that have long-term contracts will pay and get the chips they pay for whether they sell them or not. n
