Chipmaking in Malaysia: "Failure Is Not Allowed"

A new gambit: Building a chip industry from scratch

Malaysia Inc. is at it again--pouring public money into building a new industry from scratch. This time the idea is to turn Malaysia into a chip manufacturing base. The rationale is simple enough: the nation has been packaging and testing semiconductors for some 30 years. Now it wants to take its place alongside such Asian chip powerhouses as Taiwan and Singapore.

Kuala Lumpur's aspirations center on two chip foundries--one in Borneo, one near Penang. The $1.3 billion Borneo facility is largely a joint venture between the federal and Sarawak state governments; in 1998 they co-founded a company called 1st Silicon to build the foundry. The second plant is a $1.4 billion venture between the federal government and Silterra, a company founded in 1997 by Cy Hannon, former vice-president of U.S. chipmaker LSI Logic Corp. (LSI ) Both plants produce made-to-order chips for use in mobile phones, personal digital assistants, and pagers. "We're acting as a catalyst to show it can be done in Malaysia," says Ramli Othman of the Malaysian Industrial Development Authority. "That way, maybe a few more [companies] will come."

Maybe. But moving from packaging and testing chips to making them is a big leap. Moreover, given the global tech slowdown, this is a perilous moment to pump billions of dollars into foundries. Both plants opened last quarter, in the midst of the downturn. "They'll have to fight for every ounce of business," says Allen J. Delattre, a semiconductor analyst at Accenture in Los Angeles.

Still, some big players have proved willing to give 1st Silicon and Silterra the benefit of the doubt. Hoping to use the down cycle to secure new production capacity for the time business picks up, San Jose-based chip designer and manufacturer Cypress Semiconductor Corp. (CY ) is buying chips from 1st Silicon. "There's no time like today to put yourself in a position to grow faster than your competitor when times are good," says Chris Seams, Cypress's vice-president for worldwide wafer manufacturing.

"BIG LEAGUE." Sharp Electronics Corp. also has decided to hire 1st Silicon. "Not only does it give us additional flexibility," says outsourcing chief Nakamura Hiroto, "but it gives us access immediately when we need the capacity." At Silterra, signed-up customers include LSI Logic and Seiko Instruments Inc. of Japan, both of which took stakes in Silterra to guarantee it doesn't falter and interrupt their chip supply.

Malaysia's chipmaking industry still has a long way to go. "There's a wall of credibility you have to climb," says Steve Della Rochetta, Silterra's executive vice-president for sales and marketing. Indeed, it was nearly 10 years before Singapore's Chartered Semiconductor Manufacturing (CHRT ) got traction. "This is the big league," says 1st Silicon CEO Claudio G. Loddo. "Failure is not allowed." You can bet the Malaysian government told him pretty much the same thing.

By Frederik Balfour in Kuching, Sarawak

Before it's here, it's on the Bloomberg Terminal.