Infineon Keeps Chipping Away

It stuck with memory chips and is in the black. Still, it faces brutal competition

Infineon Technologies' quarterly numbers should be the occasion for an all-out bash at the chipmaker's Munich offices. After all, the world's sixth-largest maker of semiconductors is expected to report a modest profit on Nov. 10 after nine straight quarters of losses. Not just that, but Infineon (IFX ) is emerging from a brutal industry downturn stronger than before, having built up market share and displaced South Korea's Hynix Semiconductor Inc. as the global No. 3 in memory chips.

But Infineon CEO Ulrich Schumacher, who sometimes went days without sleep as he boxed through the downturn, isn't kicking back. True, the stock is up 72% since January, and the future of the former Siemens (SI ) unit looks brighter than it has in years. Plus, analysts say Infineon has a lead of at least several months over rival Samsung in a crucial new chip-manufacturing technology, allowing it to make money at price levels others can't. The company is expected to log a net profit of $57 million for the quarter ended Sept. 30, on sales of $1.8 billion. Ulrich predicts 2004 will be "very positive," but adds: "It's too early to celebrate."

The biggest threat Infineon faces is another ruinous price war. The company is highly dependent on the boom-and-bust market for memory, or DRAM, chips. While big competitors such as Intel (INTC ), Texas Instruments (TXN ), and Toshiba (TOSBF ) walked away from memory years ago , Infineon's management decided to stay put: DRAM chips account for 39% of sales.

Now Infineon is enjoying the fruits of its decision to defy the downturn and invest some $1.3 billion in technology using 300-millimeter silicon wafers to produce chips. Its flagship factory in Dresden etches chips onto a silicon wafer more than twice as large as the previous standard. When the wafer is sliced into individual chips, unit costs drop dramatically. HVB Group analyst Guenther Michael Hollfelder in Munich estimates that at current prices, Infineon makes $1 on every memory chip it sells, a pretax margin of nearly 20%. If prices for benchmark chips rise above the current $5, "you'd see some good margins," says Schumacher.

STAY ON TOP

The big unknown is what will happen in the DRAM market. DRAM prices have risen more than 10% since midyear, powered by consumer demand for personal computers. Analysts also figure companies can't wait any longer to replace aging PCs, analysts say -- but such predictions have proved wrong before.

Schumacher has other worries. The Infineon unit that makes chips for the telecommunications industry failed to stay on top of new technology. So when former parent Siemens, which still accounts for about 14% of Infineon's sales, wanted chips to run its new multimedia phones, it had to turn to others; Infineon didn't have the right product. The division's chief, Ulrich Hamann, has been replaced.

Still, Schumacher gets credit for some smart moves. To free up capital, he has linked up with Taiwan's Nanya Technology and China's Semiconductor Manufacturing International Corp., trading knowhow for production capacity. That allows Infineon to meet demand without spending billions on new fabs. Infineon is teaming up with Advanced Micro Devices (AMD ) on new ways of using photo technology to imprint circuits on microchips. Schumacher has more freedom to cut deals since Siemens reduced its stake to about 40%. "That has given the company wings," says Andrew Norwood, an analyst at Gartner Dataquest in Egham, England.

After laying off some 6,000 workers, Schumacher wants to wring out another $580 million in costs by outsourcing functions such as human resources and information technology. His goal: to be one of the top four chipmakers. Maybe then Schumacher will party.

By Jack Ewing in Frankfurt

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