Singapore Sting

Do a chipmaker's woes reflect the island nation's missteps ?

In the late 1990s, Singapore's Chartered Semiconductor Manufacturing Ltd. made a bold play to catch up with its Taiwanese rivals. For years, despite hundreds of millions of dollars of investment from the Singapore government, Chartered could not close the gap with Taiwan Semiconductor Manufacturing Co. (TSMS ) and United Microelectronics Corp. (UMC ). These Taiwan giants had invented the chip foundry industry--the expensive but profitable business of making customized chips on order for companies in the telecom, computer, and other industries.

Chartered badly wanted a piece of this pie. So it bet big on what was then considered a market of almost limitless potential: communications. Chartered added two chip-fabrication plants to its existing pair. And while TSMC and UMC maintained a diverse base of customers selling PCs and consumer electronics, Chartered decided to focus on a few big customers like Ericsson Microelectronics (ERICY ) and Broadcom Corp. (BRCM ) that specialize in chips for cell phones, cable modems, and other such equipment. Investors liked the idea: In 1999, Chartered raised $550 million in an initial public offering.

FLYING TURKEY. The strategy turned out to be a huge miscalculation. Today the chip industry is glutted with excess capacity, and no niche is more glutted than communications. Fourteen months ago, Chartered was operating at full capacity; now, its five plants are producing less than a quarter of what they could. Simply to break even, estimates Chief Financial Officer Chia Song Hwee, Chartered needs to boost its output to 70% of capacity. On Oct. 22, Chartered reported third-quarter sales of just $79 million, down 74% from the previous year, and $118 million in losses. Analysts expect the bleeding to continue. Chartered will likely lose $392 million this year and an additional $457 million in 2002, says Andrew Lu, a chips analyst with Salomon Smith Barney in Taipei.

In a nation bent on becoming a chip-making hub, Chartered's blunders are acutely embarrassing. The government, which controls 60% of Chartered's shares, had been counting on the company to spearhead Singapore's move away from labor-intensive industry into more capital-intensive high-tech manufacturing. "The Singaporeans looked great for a year," says an investment banker who specializes in technology. "But in a strong wind even turkeys can fly. Now we're back to reality."

To be sure, some of Chartered's problems were unavoidable. Most chipmakers are suffering. But Chartered is especially vulnerable. Last year, it derived 51% of its revenues from communications, compared with about 30% at TSMC. "We're taking the pain this year because of that exposure," says Chia. But he insists Chartered (CHRT ) will recover once demand for communications chips rebounds. Analyst Lu concurs. "Eventually," he says, "this sector will bring much better growth than the PC sector."

Still, skeptics wonder if Chartered has what it takes to compete. The company's research and development budget is $80 million this year, about a third of what TSMC is spending. "It's public knowledge that Chartered is behind in technology compared to TSMC and UMC," says Rick K. Hodgman, who runs Broadcom Corp.'s Asian operations. Indeed, Broadcom takes only simpler chips from Chartered, buying the more sophisticated variety from the Taiwanese.

At the same time, the Singapore government, obsessed with building a credible chip industry, seems to be hedging its bets. The state is a partner in a local fab being built by UMC. And it has joined up with TSMC and Philips Semiconductors in another plant that will compete directly with Chartered. "We are building an industry," explains Barry Sim, director of the electronics and precision-engineering cluster at Singapore's Economic Development Board. "It takes more than just Chartered."

Chartered, of course, contends that it is in a strong position. Chief Technology Officer John E. Martin says its engineers are "doing more with less." Next year, he predicts, Chartered's ability to stuff more circuitry on a wafer will be "at parity" with that of its more powerful rivals. Besides, says Chia, Chartered has enough cash to weather the downturn. Although it is utilizing only 22% of capacity, he says, the company burns through only $5 million a quarter from its $1.2 billion war chest. It has a credit line of $874 million, and its debt-to-equity ratio is a manageable 60%. "We can last for quite a while," says Chia. The question is whether the company can become a consistent profit-spinner.

By Bruce Einhorn in Singapore

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