Why Infineon Wants Asian Allies

With one tie-up on the rocks, it's on the prowl

In the turbulent, high-stakes world of chipmaking, few players have been as bold as Germany's Infineon Technologies (IFX ). The company is determined to stay in two widely different businesses at the same time: mass-market memory chips and more specialized processing and logic chips, especially those used in cell phones, cars, and industrial equipment. Infineon's argument: The two sectors, which often follow different boom-and-bust cycles, balance each other out in tough times and cross-pollinate advanced technology.

It's a balancing act that other chipmakers such as Toshiba, NEC and IBM long ago abandoned as too costly. Even the world's largest memory-makers -- Korea's Samsung Electronics Co. and Micron Technologies (MU ) in Boise, Idaho -- don't really attempt it. But Infineon Chief Executive Ulrich Schumacher is a gutsy guy: His company has solidified its position as the world's third-largest maker of commodity dynamic random-access memory chips (DRAMs) and moved into sixth place overall among the world's chipmakers without spending billions on factories.

How? Infineon snuggles up to Taiwanese partners that make the chips and splits the enormous cost of developing production facilities. In some cases, Infineon shares the profits, while in others, it simply buys ready-made chips. "It's obvious we need strong partners," says Schumacher. The alternative? "Get out of the business."

Now, Infineon is sinking even deeper roots into Asia. In late February, Schumacher revealed details of a new joint venture with Taiwan's Nanya Technology Corp., the world's fifth-largest DRAM maker. The two companies will sink a total of $2.2 billion into the 50-50 venture, and they expect to complete a new plant near Taipei by yearend. And in December, Infineon announced plans to license technology to -- and buy chips from -- Semiconductor Manufacturing International Corp., a Shanghai foundry. Over the next few years, Infineon plans to invest at least $1.5 billion, more than half of its total capital budget, in Asia. It's even considering moving its headquarters to Singapore. Analysts think the risk-sharing is smart. Infineon "can't remain a top-five player in both DRAM and logic unless they do this," says Jean D'Anjou, an equity analyst at Crédit Suisse First Boston in Paris.

The concern is whether Schumacher will have smooth sailing with his new partners. Even as he races ahead with Nanya, another Infineon venture has been melting down in a volley of recriminations. ProMOS Technologies, a joint venture that Infineon established six years ago with Hsinchu-based Mosel Vitelic Inc., is falling apart. Schumacher says Mosel didn't want to invest enough in new production methods to keep up with rivals. Mosel Vice-President Thomas Chang counters that the company is as committed as ever: "Our business remains the same," he says.

In January, Schumacher scrapped Infineon's shareholder agreement with the Taiwanese company. In retaliation, Mosel stopped providing Infineon with its share of the chips from the venture and tried to kick two of Infineon's three representatives off the ProMOS board. Infineon went to Taiwanese court and got its board members reinstated, but it still isn't getting any semiconductors from ProMOS. Neither side holds out much hope of resolving the dispute, and Chang says Mosel is looking for alternative partners as well. "There are plenty of opportunities out there," he says.

The embarrassing denouement of Infineon's flagship Taiwanese deal raises troubling questions about Schumacher's approach. While the company's other Asian relationships appear solid, the problems with ProMOS -- which produced 15% of Infineon's DRAM -- highlight the vulnerability inherent in relying on third parties for critical manufacturing capacity. Infineon says it has already made up the missing capacity by raising production in other plants. Still, "there are bound to be people around the world who ask whether this means Infineon's partnership model has failed," Schumacher concedes.

His answer? No way. All of Infineon's other deals, he says, have been big successes. Winbond Electronics Corp. and United Microelectronics Corp. both make chips for Infineon. Nanya execs, meanwhile, say they're not afraid their deal will hit the same shoals that sank the Mosel partnership. "This is quite different," says Nanya President Jih Lien. Unlike Mosel, he says, Nanya will have the same rights as Infineon to use technology belonging to the joint venture. "Everybody is equal." That's a lesson in East-West relationships that Schumacher may wish he had learned earlier.

By Bruce Einhorn in Hong Kong and Andy Reinhardt in Paris

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