Infineon slashes investment in new factories

By Lucas van Grinsven

SEVILLE, Spain: Infineon Technologies, Europe's second largest chip maker, said on Tuesday it would slash investment in new factories as the semiconductor industry struggles with the worst downturn in its 50-year history. The number six chip maker worldwide said it would no longer invest in factories that produce non-memory products, which generate most of its sales. Analysts said the move made sense as the sector has failed to rebound.

"We won't do any more logic-manufacturing investments. If demand (for logic) becomes higher than our current capacity, we'll go to foundries," Chief Executive Ulrich Schumacher told Reuters at the sidelines of the annual ETRE technology conference in the Spanish city of Seville.

Foundries are contract chipmakers that manufacture chips on behalf of, and using the designs of, other chipmakers. Infineon also has older memory chip production capability that it can shift to non-memory, though the reverse is not possible.

"For memory it would be dangerous (to cut back investment) but not non-memory," said Jerome Ramel, an analyst at KBC Securities in Paris. "Infineon has enough capacity for at least a year." Ramel has a "sell" rating on the share.

Companies sell memory chips into a commoditised market, in which they compete on cost control and output. For logic chips, however, design and support are more significant to buyers than manufacturing technologies. Infineon's Schumacher added that the chipmaker could still make a few minor logic-manufacturing investments, but for the most part, production of logic chips -- used in mobile phones and car entertainment systems -- would shift to foundries.

"From all the (non-memory) capacity which we can outsource, it's pretty likely that we will go to at least 50 percent in foundries," Schumacher said. Infineon currently outsources between 10 and 15 percent of all its production, but the company is under pressure to reduce its capital investment in order to return cash to shareholders.

Infineon shares were down 4.24 percent at 5.20 euros at 1545 GMT, after previously rising as much as 5.5 percent, as the blue chip German DAX fell 4.04 percent. The DJ Stoxx European Tech index was down 1.16 percent.

Memory Investment

Schumacher said the company will continue to manufacture its own memory chips, the standard chips used in personal computers which generate between 25 and 40 percent of its sales, depending on volatile selling prices. Infineon has just installed expensive state-of-the-art production equipment for memory chips. "In (memory chips) our production technology is a competitive advantage," he said.

Schumacher acknowledged that in the current depressed economic climate, it was hard to generate funds on the capital markets to finance new factories. For logic chips Infineon would spend its cash only in areas that would make a difference, such as new chip designs and development of new products.

"We're very careful... We want to keep the cash. Due to the fact that we now have invested (in new memory production equipment), over the next 1.5 to two years we can get by with extremely low levels of capital investments," Schumacher said. When asked to specify these levels, he said: "Very, very low. Far lower than the competition. Even lower than you'd have thought it could be."

The company is currently spending around 100 million euros ($97.9 million) per quarter in capital investment. For 2002 to end-September, it was targeting an annual capital budget of 900 million euros. Infineon's European peers are planning higher capital expenditure. Philips Semiconductors, the global number 10 and Europe's number three, has targeted capex between 500 million and one billion euros for the full year. 

KBC Securities' Ramel said he would not be surprised to see a general decline in capex spending in 2003. "In the worst case previously we have seen capex cuts by IDMs (integrated device manufacturers) for two years running, but I think we will see two and a half to three years of capex cuts this time," said Ramel. "There is no recovery in sight."

IDMs are semiconductors manufacturers such as STMicroelectronics, Infineon and Intel, with integrated research and development and marketing activities. Infineon had to tap the capital markets earlier this year. With two billion euros cash in the bank and positive operating cash flow of 300 million last quarter, it is planning to hold on to the cash while market recovery appears elusive. "For the next two quarters we see very small signals of relief," said Schumacher.

He reiterated earlier guidance ahead of quarterly results next month. He also reiterated that 2003 would be be "definitely better" than 2002, pointing to sequential revenue increases in the non-memory business over the last three quarters and to hopes that the depressed memory market would recover.

To that end Infineon, as well as its bigger memory chip rivals Samsung Electronics from South Korea and Micron from the U.S., depends on the fate of ailing South-Korean chip maker Hynix. Hynix, which is on the verge of financial collapse but has so far been supported by government-controlled banks, "is putting the whole (memory) business section under tremendous pressure," Schumacher said.

Chipmakers claim Hynix is ruining the market by selling its products at any price higher than the huge fixed costs for equipment. "I would say it's unfair," Schumacher said.

(With additional reporting by Sarah Knight in Frankfurt)

($1=1.022 Euro)

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