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A Chip Upstart In Galilee

Science & Technology: SEMICONDUCTORS


No freelance chipmaker outside Asia rivals Tower in size

Bankers laughed in 1992, when Yoav Nissan-Cohen and Rafael M. Levin asked for money to buy a National Semiconductor Corp. chip plant in Migdal Ha'emek, Israel, where they worked. They wanted to convert the plant, which National had put up for sale, into a "foundry" that would make chips under contract for other companies.

The bankers' derision was understandable. Contract manufacturing of chips wasn't considered a healthy business in the early 1990s. Taiwan Semiconductor Manufacturing Co., today the world's largest foundry, hadn't yet proved that such chip factories can be highly profitable.

WELL-TIMED ENTRY. Happily for the entrepreneurs, George Morgenstern didn't laugh. The head of Data Systems & Software Inc. in Mahwah, N.J., saw a steal. Because National was restructuring, it was willing to part with an 80% stake in the plant for just $20 million, mostly assumption of debt. Morgenstern coughed up a $4 million downpayment, then sold 40% of his stake for $8 million to Israel Corp., a holding company headed by billionaire Shaul Eisenberg.

It turned out to be a huge bargain. A worldwide explosion in semiconductor markets is creating an insatiable demand for foundry-made chips. A case in point: Taiwan Semiconductor's revenues soared 49% in 1995, to $1.2 billion, and its profit margins were 55%--even better than those of Intel Corp.

Nissan-Cohen and Levin are hardly in that league. But the company of which they are co-CEOs, Tower Semiconductor Ltd., is the biggest foundry outside East Asia. It has posted sales growth of 60% a year, with profits more than doubling in each of the past two years. Earnings topped $20 million in 1995, on sales of $99.6 million. Morgenstern's $4 million gamble is now worth $80 million. These are heady times for Nissan-Cohen and Levin, both of whom have doctorates in physics and spent several years in the U.S.--Nissan-Cohen at General Electric Co.'s research center and Levin at AT&T Bell Laboratories. Says Nissan-Cohen: "Our entry couldn't have been timed better."

National is still the plant's leading customer. "All of the products we were producing there are still being produced there today--but in greater volume," says George M. Scalise, National's executive vice-president. Other customers include Motorola, Hewlett-Packard, and Chip Express, an Israeli startup that has developed a system for producing chips in as little as one day in volumes as small as one chip (box).

DUTY-FREE ADVANTAGE. Each of Tower's customers prescribes slightly different chipmaking processes that are tuned to its chip designs. Tower engineers work with the customers to make sure process matches product. Nissan-Cohen argues that attention to such details distinguishes Tower from its larger competitors. But some analysts say Tower is simply benefiting from the overall growth of the sector. "They're not doing something special," says John Chen, an analyst at VLSI Research Inc. in San Jose, Calif. "This is just a good time to be in the foundry business."

To prepare for more growth, Tower is adding a third floor to its building, nestled in the Galilee hills near Nazareth, and converting ground-floor offices to manufacturing. The $240 million project will triple capacity from three years ago. Later, Tower wants to build a $900 million chip plant, or fab, that would triple production again.

Levin and Nissan-Cohen can't hope to match the expansion plans of their East Asian competitors. Taiwan Semiconductor began building a pair of billion-dollar fabs, its fourth and fifth, even before fab No.3 started production last fall. Similar expansions are under way at Singapore's Chartered Semiconductor Manufacturing and Taiwan's United Microelectronics. Instead, the co-CEOs are focusing on locking in key customers. Says Levin: "We stress strategic alliances that force us to adjust to the customers' needs"--so customers won't see much gain from shifting to a rival to get a lower price.

Being in Israel gives this toddler of a foundry an edge on its giant Asian competitors: Tower can export chips duty-free to the U.S. and Europe--and it has barely begun to tap demand in Europe. The onetime white elephant is shaping up as one profitable pachyderm.BY NEAL SANDLER IN JERUSALEM

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