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Pure play foundries now in cash preservation mode

31 October 2008 | By Mark Osborne | News > Fab Management

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Pure play foundries now in cash preservation modeA significant fall in customer demand for the fourth quarter of 2008, coupled to poor visibility into demand cycles for 2009, is forcing the big four (TSMC, UMC, SMIC & Chartered) pure play foundries to cut capital spending and employ a range of cost cutting methods in an effort to preserve cash. Spreadsheet preservation had until now been a preserve of the memory manufacturers as many are enduring 7 quarters in a row of losses while unable to raise funds at realistic rates as the credit crunch and economic slowdown unfolds.

Capital spending at the main foundries has already been muted in 2008, as they attempt to raise wafer ASPs and keep fab utilization rates high, which has worked successfully for the first 3 quarters of the year.

However, the rapidly deteriorating market conditions will see fab utilization rate decline, with UMC projecting an operating loss as utilization fall to approximately 55 percent. Indeed, UMC posted its first quarterly loss in 7 years for the third quarter, while utilization rates were at 79 percent.

Chartered Semiconductor revealed that revenues in the third quarter of 2008 were up 31 percent compared to the year-ago quarter, driven by a better product mix and strong growth in wafer starts from leading-edge nodes. Chartered reported that revenues from 65nm alone that now includes both SOI and bulk technologies, grew 48 percent sequentially and makes up 19 percent of total revenues.Chartered has historically suffered the burden of having the highest breakeven point of the major foundries

However, net loss was $24.4 million and shipments decreased by 0.6 percent compared to 517.3 thousand (200mm wafer equivalents) shipped in second quarter 2008. Capacity utilization was 85 percent for the third quarter down slightly form 88 percent in second quarter 2008.

“The negative macroeconomic environment that has been prevailing for several months and the resulting difficult market conditions are finally impacting the foundry industry,” commented George Thomas, Senior Vice President and CFO of Chartered Semiconductor. “We started to see orders declining from the middle of August, followed by some customer requests to reschedule deliveries forward. The weakness is expected to deepen into the fourth quarter, and current uncertainties in the market place make it difficult to predict with accuracy how the quarter will turn out. Based on current outlook, we are guiding for Chartered revenues to be down approximately 21 percent sequentially and revenues including Chartered’s share of SMP to be down approximately 22 percent sequentially in the fourth quarter. In line with the demand outlook, we are also reducing our capital expenditure for 2008 to $650 million, which is $100 million lower than the amount we had earlier anticipated.”

Chartered has historically suffered the burden of having the highest breakeven point of the major foundries, resulting in losses beginning earlier than its rivals and recovering much later, limiting its window of sequential quarterly periods of profitability.

Not surprisingly, Chartered has announced plans to be implemented that will see its breakeven point lowered to be inline with a utilization rate of 75 percent by the fourth quarter of 2009. A key part of the spreadsheet preservation will be the curtailing of fab equipment spending to that of only essential technology buys.

Chartered is not expected to give detailed CapEx spending plans for 2009, until next January, however Chia Song Hwee, president & CEO of Chartered, noted that “directionally we expect it [CapEx] to be significantly lower next year, compared to this year.”

Although Chartered has made previous attempts at lowering its breakeven point, such plans have been painful to implement. However, Chartered is perhaps in a better position than in previous downturns as it has both the leading-edge processes and 300mm fab capacity to offer customers.

SMIC has already been suffering a long period of small quarterly losses, but the China based foundry is making further cost cutting measures in the wake of falling demand. CapEx spending for 2008 will not be curtailed due to its need for technology buys at it transitions 300mm fabs away from memory production to logic. Spending therefore remains at $790 million for the year.

However, Dr. Richard Chang, Chief Executive Officer of SMIC, said that “under the current business environment, we are working hard to tightly control costs and intend to hold back any capacity expansion until we have clear visibility of end-customer demand.”

Capital spending for 2009 is expected to be in the range of $100 to $200 million, primarily technology and essential replacement tools and spares.

Pure play foundries now in cash preservation mode Foundry powerhouse, TSMC has also not reduced planned capital spending for 2008, which is expected to be $1.8 billion. However, TSMC’s CapEx plans for 2009 are under evaluation and could be reduced by 20 percent from 2008.
 
However, TSMC indicated that visibility into next year was limited, suggesting that spending plans will be deeply scrutinized and subject to revision. With the increased demand seen for 65nm processes and first customer ramps at the 45nm node, TSMC has a need to retain higher levels of spending than its rivals, outside the simple fact that it is twice as big as its nearest rival.
 
With a week of foundry news, what is clearly visible is that capital spending will be significantly lower in 2009 and cost controls will be the business rule.

 

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