Few Fabs For The Fabless

Asian chipmakers may be enjoying their recovery, but some of their customers are getting nervous. Ask the "fabless" companies that design chips, then farm production out to foundries such as Taiwan Semiconductor Manufacturing Co. and United Microelectronics Corp. These designers need to fill orders from hundreds of companies cranking out growing volumes of electronic gizmos. But Asian investment in chip production lines isn't keeping pace. "The foundries are all maxing out on capacity right now," says Dan Hutcheson, head of VLSI Research in Silicon Valley. Chinese fabs could fill the gaps in a few years. But near term, designers may have to pay more for their chips. "It's a train wreck waiting to happen," he says.

The lesson for fabless companies is clear: "You better have a close relationship with your foundry partner," says Jodi Shelton, executive director of the Fabless Semiconductor Assn. But even that's no guarantee. MediaTek, a Taiwanese designer of chips for DVD players, is the world's fifth-largest fabless company, with $840 million in sales. Yet that won't ensure space with its foundry, UMC, which once owned MediaTek and still has a 12% stake. Says the company's Finance Director Mingto Yu: "I don't think they can give any commitments on capacity." As for China, many fabless companies are wary of the giant's lax intellectual-property protection. So, as the wait for space at established foundries stretches out, fabless firms could be spending a long time on the line.

By Bruce Einhorn in Hong Kong and Adam Aston in New York

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