Not So Fab for a Singapore Chipmaker

Chartered Semiconductor CFO Chia Song Hwee gamely maintains that hard times and ferocious competition haven't changed its game plan

By Bruce Einhorn

Does Singapore's Chartered Semiconductor Manufacturing have what it takes to catch up to the world's two biggest chip foundries, Taiwan Semiconductor Manufacturing and United Microelectronics? The Singapore foundry rarely shows a profit, even in the best of times. And with the global chip industry mired in a terrible slump, these are certainly not the best of times.

Chia Song Hwee, the chief financial officer of Chartered Semiconductor, remains optimistic. I spoke recently with him at one of Chartered's fabs in the northern part of Singapore, just a short distance from the causeway that connects the tiny city-state to Malaysia. (see BW International, 11/19/01, Singapore Sting). Here are edited excerpts of our conversation:

Q: Do you see any sign of a turnaround for the industry?


In the third quarter, we started to see the revenue decline for a lot of semiconductor companies slowing. It's stabilizing. If we ignore the macroeconomic issue, we can say that we are bouncing along the bottom.

Q: How have the foundries compared to the rest of the chip players?


It's going to be a bad year. It's a tough year for all the semiconductor players, including the foundries. In past cycles, the foundry industry was more resilient [than the rest of the chip business]. This time, it's different. The foundries are falling faster than the others are. Year-to-date, semiconductor revenue contraction is nearly 30%. But for the top three foundries, the rate of reduction is 55%. And our decline is in the 60% range.

Q: Why has Chartered done worse?


We have very large exposure in the communications sector. In 2000, 51% of our revenue was in communications. When that revenue contracted significantly, we took the biggest hit. TSMC [Taiwan Semiconductor Manufacturing Co.] is more in the PC market and has performed relatively well. We are taking the pain this year because of that exposure [to the communications sector]. We are paying the price.

Q: Why the big bet on communications?


We came out of the 1998 semiconductor recession with two new facilities -- fabs 3 and 5. We could try to get 200 customers and qualify them at the same time, or we could get a few high-quality customers serving as our anchor tenants. We went for the second approach because the first was undoable. It could take as long as six to nine months [to qualify]. If you are doing that with 200 customers, how many engineers do you [need to] have? That is the challenge.

Q: Wouldn't it have made more sense to go slower? Why add so many fabs so quickly?


To survive in this space, you need to have scale. Otherwise, you're just mediocre. So we built fabs 3, 5, and 6, using the slowdown to catch up. The competition was more balanced, starting one fab at a time. After 1998, we could have taken things slowly. But we wanted to get to economies of scale much faster. We wanted customers with high growth potential.

Before 2001, that was communications. So STMicroelectronics and Ericsson were among our top five customers. That helped us grow at a very rapid rate -- we achieved full utilization in our fabs. But what we didn't predict was that the communications industry got into an overbuilt situation.

Q: Given the downturn, is Chartered going to change in strategy?


We have revisited our strategy a couple of times. None of the events has caused us to think we have the wrong strategy. We will continue with that.

Q: Your rivals are busy starting production of next-generation fabs, which produce wafers that are 12 inches in diameter rather than 8 inches. What is Chartered doing?


Fab 7, our 12-inch facility, is completed, watertight. We completed it in January. The original plan was to start shipping in mid-2002. Now we are moving that to 2003.

Q: With Chartered operating at just 22% of its capacity in the third quarter, wouldn't it make more sense for the company to consolidate work into one fab and shut down the others?


Customers don't want to move [from one fab to another]. To get a product requalified [at a different fab] is a very lengthy process. If we do that, our customers are going to be very upset.

Also, [to reopen a shuttered fab] we would have to go through the qualification process again. The longer a fab is shut down, the more costly it would be. If we take the short-term measure of shutting down, we have no revenue, and we cut the future because we can't do engineering work and can't qualify for future work.

Q: As you know, the Singapore government's Economic Development Board is working with your Taiwanese rivals and investing in their plans to open Singapore fabs. Isn't that a problem for Chartered?


Am I upset that they are in Singapore? No. The EDB has a bigger agenda -- to strengthen and build the semiconductor industry. From our perspective, it means that more and more suppliers will come in. That strengthens the infrastructure. We will benefit from it. It doesn't matter where [the Taiwanese] are. We don't have customers in Singapore, and neither do they. There are none. Where your factories are is not important.

Q: So what do you say to people who doubt Chartered can weather this storm?


To break even, we need to get to 70% capacity utilization. In a capital-intensive business, you look at cash flow. My burn rate of cash per quarter, at 22% utilization, is minus-$5 million. That's not significant. In September, we had cash and cash equivalents of $1.2 billion and a credit facility of $874 million available. We can last for quite a while.

Einhorn covers technology from Hong Kong for BusinessWeek. Follow his weekly Online Asia column, only on BW Online

Edited by Beth Belton

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