Foundry chip makers face more cutbacks

by Dan Nystedt

March 20, 2008 —

Flash memory giant Spansion
on Wednesday announced it will reduce orders to contract chip makers by US$50
million per quarter in the first half of 2008 due to new production technology
at its own factories. But the order changes couldn't come at a worse time for
manufacturers because other companies are cutting back as well.

Contract chip makers (foundries) such as Taiwan
Semiconductor Manufacturing (TSMC) and United
Microelectronics (UMC) make money by producing chips on behalf of clients
such as Spansion and Texas Instruments
(TI). TSMC is Spansion's main foundry partner through a joint chip development
agreement, and is also one of TI's foundry partners.

"We remain fully committed to our agreement with Spansion," said
JH Tzeng, a spokesman for TSMC. He declined to comment on possible order cuts
to his company.

The global technology industry faces the prospect of slower consumer demand
this year due to U.S. economy woes. Many economists have already pronounced
the U.S. in a recession as a result of problems in home loans and financial
industries, and many fear those woes will spill over into consumer spending
on gadgets.

The mobile phone industry has already taken a hit.

Last week, TI indicated it will cut orders to contract chip makers in response
to declining orders for chips used in high-end mobile phones. TI lowered its
sales and net profit forecasts for the first quarter due to the problems.

Sony Ericsson
followed TI's handset warning by Wednesday saying it sees slowing market growth
for mid-to-high end mobile phone sales in Europe, a sign there might be more
pain for handsets and, ultimately, for chip makers. Sony Ericsson reduced its
sales forecast for the first quarter, which ends March 31, to below that of
the first quarter last year.

Spansion faces falling prices for its chips on global markets. The flash memory
business has faltered this year amid a chip glut that has sent prices tumbling.

The price of mainstream 4G bit NAND flash chips has fallen 33 percent so far
this year to US$4.06 Thursday, according to DRAMeXchange Technology, which runs
an online memory chip
market.

The company's increased manufacturing efficiency should help bolster its finances,
but the memory chip business remains tough. Spansion's stock, which trades on
the NASDAQ exchange, has fallen 37 percent so far this year to close at US$2.47
Wednesday.

One hope for foundry chip makers such as TSMC is that any reductions in chip
orders by one company may be made up in increased orders by other chip companies.
Qualcomm, for example, reiterated its first quarter guidance at a meeting last
week. The company usurped TI's position as the world's largest mobile phone
chip maker last year. Qualcomm also taps TSMC and other foundries for chip making
services.

IDG News Service