New markets, new designs

Electronic News, Jan 5, 1998 by Jim DeTar

Industry executives say that fabless semiconductor companies should be able to get all the capacity they need this year and, although the major independent foundries such as Taiwan Semiconductor Manufacturing Corp. (TSMC), Chartered Semiconductor and others will probably not operate at anywhere near full capacity, they are expected to do well.

Steve Tobak, VP of marketing and communication for National Semiconductor, thinks the oversupply will be just another factor helping drive the industry. "Capacity will continue to grow and outpace demand. That's very positive for industry growth. It will create a highly competitive environment that will drive the cost of systems down."

At the same time, the ongoing Asian currency and financial markets crisis is expected to have mixed effects on the semiconductor industry. On one hand, there is a threat to the world economy if the currency crisis in Korea spills over into Japan which is still reeling from several years of slow economic growth. On the other, lower cost components made by South Korean companies will benefit U.S. and Japanese system vendors.

John Bourgoin, president of MIPs Computers, said his company is one of the many companies dealing in the international market that has felt the effects--both negative and positive--of the Asian crisis. "I think there are so many effects as a result of that occurring, and each has a different time constant; it is obviously going to have an impact of some sort. There are also secondary impacts that are less obvious. We've had our business impacted a little by it but there are counter-effects occurring elsewhere (in MIPS' business)."

Barring a major collapse of an Asian economy, the devaluation of the South Korean won will benefit many American and Japanese companies that buy goods from South Korea and will now likely do so at cheaper prices. Devaluation of the won also has a silver lining for South Korea as that country will now collect nearly twice as much in South Korean won for a product sold in the U.S. as it did a year or so ago.

"There are some very interesting trade-offs," Hitachi's Mr. Mahoney said. "It's true that because of the depreciation of the won, the South Korean companies can sell at a lower dollar price. If you take a longer view and don't look at inventory though, all of the capital equipment they need is usually bought from U.S. or Japanese companies such as Lam Research and Tokyo Electron. With the depreciation of the won, that capital investment becomes phenomenally expensive. Debts are principally denominated in currency other than the won. The cost of debt service increases dramatically, and this will dramatically impact investment by South Korean companies."

But will the reverse be true? Will the loss of South Korean semiconductor sales impact U.S. and Japanese suppliers? "The loss of semiconductor business in Korea will be nothing compared to the benefits of reduced competition," Mr. Mahoney contends "In other industries the effect could be more important but the impact of loss of their semiconductor business is minimal compared to competitive advantage we will gain."