Where The Valley's Chips Are Born

It's the kind of East-West hybrid that still makes Silicon Valley the center of the semiconductor universe. NuCORE Technology Inc., a maker of chips for digital cameras, raised its venture capital in the Valley, and its headquarters and most of its 80 engineers are in Sunnyvale, Calif. Its founder, Seiichiro Watanabe, and its top customers -- including Canon (CAJ ), Sony (SNE ), and Kyocera (KYO ) -- are Japanese. But its cutting-edge devices, like those of most other U.S. chip startups, are made in Taiwan.

The importance of the silicon umbilical cord connecting America to Taiwan is hard to overstate. The island's "foundries" -- factories that make chips for other companies on a contract basis -- dominate what has become a $16 billion global industry. They free chip designers from the need to have their own expensive plants. Since the first foundry, Taiwan Semiconductor Manufacturing Co. (TSM ) (TSMC), hit the scene in 1987, it has been followed by a host of others, including giant crosstown rival United Microelectronics Corp. (UMC ).

These Taiwanese factories have been instrumental in the success of virtually every new U.S. semiconductor company in past 15 years. Today, TSMC and its rivals offer customers a "library" of chip designs -- bits of off-the-shelf code that developers can add to their core design to perform vital functions such as communications. As a result, Taiwanese companies remain vital contractors for multibillion-dollar giants such as Qualcomm (QCOM ), Broadcom (BRCM ), and Nvidia (NVDA ).

Just as important, they help nurture countless chip startups that are driving innovation in telecom and consumer electronics. TSMC figures that roughly half of its 300 U.S. customers are outfits whose first devices hit the market in the past six months or are still in development. NuCORE has tapped TSMC since launching its first chip in 2001. And for two years, engineers at TSMC have been collaborating with NuCORE on its next act: a processor, code-named Puma, that will let home moviemakers put together high-resolution multimedia videos inside their camcorders.

Even though a cyclical dip in chip demand has crimped their earnings recently, big Taiwanese foundries are growing in importance. Each new leap in technology that allows more transistors to be crammed on ever-smaller slivers of silicon increases the cost and complexity of making chips. So designers rely more heavily on foundries to help solve manufacturing challenges. Over the next six months, for example, Santa Clara (Calif.)-based Nvidia, a leader in computer-graphics chips for game consoles such as Microsoft's (MSFT ) Xbox and Sony's PlayStation, is rolling out a series of devices with transistors just 90 nanometers apart, the current state of the art. "Our collaboration with TSMC has been quite intimate because our whole business proposition depends on us having the latest processes," says Chris A. Malachowsky, Nvidia's executive vice-president for engineering.

The efficiency of the foundry can help determine whether a new chip is a windfall or a bust. Nvidia spends $350 million to develop a new family of chips, which often have a market life of less than a year. So coming out a month late can be costly -- and flawed chips can hammer profitability. Already, Nvidia is working with TSMC and other industry players on the move next year to even denser chips, with just 65 nanometers separating the transistors.

TSMC and its rivals are preparing for new challenges. With a research budget of $400 million, TSMC claims to have a working transistor with a line width of 10 nanometers -- a generation that is still as much as a decade away. As other Taiwanese foundries ramp up research spending, too, it's likely Taiwan will remain vital to Silicon Valley's success for years to come.

By Pete Engardio in Sunnyvale, Calif.

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